Investment argument / discussion

[philehidiot]

So me and someone at work have been having a discussion about how would be best to invest a hypothetical £50K. My argument is that, given interest rates have been low and are only likely to go up that it would be best to pay off a huge chunk of mortgage. I can't see that banks are ever going to give out more for savings than they take in mortgage or they'd be broke and in the long term surely it's better to clear your debt first before you start investing as surely you're going to pay more money towards maintaining the debt than you are going to get back. His argument is that it would be better invested so at least you can ideally access the capital if you need it and that the right investment should return a decent income. I've seen some ISA things that give you a decent income for low risk and he's looking at how risky it would be to invest in stock markets using this new software which buys and sells pretty quickly.

What do people think?

[peterb]

It is almost always the case that paying off debts is usually the first thing you should do unless your investment generates a greater return than the cost of servicing the debt.

And there are lots of factors to consider - the investment risk being one, and how much you can afford to lose if a high risk investment turns bad (generally the higher the potential return, the greater the risk)

Another is the period of time you are prepared to invest. House prises tend to rise, but there are short term peaks and troughs - the same goes for stocks and shares - unless you are prepared to actively manage your portfolio intelligently!

It is also a good idea to keep some cash on deposit for those emergency rainy day occurrences.

[DanceswithUnix]

I don't think there is a simple answer to that.

£50K might be enough to trigger early repayment penalties on a mortgage reducing the effectiveness of the repayment. If you are on a long term fixed mortgage, then soaring interest rates would help with savings and not hurt your mortgage one jot. But then you look on an interest calculator at the thousands that a mortgage is costing, and you really want to see it gone.

[Rob_B]

It totally depends on what your mortgage balance/rate is and what savings/investment rate you'd get. You can't compare unless you know all of that.

For me, that 50k would save over 13yrs and nearly 19k interest, so yeah, I'd go with paying that off

YMMV

[Jonatron]

It gets complicated quickly once you realise the variables there are:
Current+Future mortgage interest rate
Current+Future savings interest rate
Current+Future investment interest rate
Mortgage extra repayment penalty
Current mortgage LTV

There's probably more variables, and you can't predict the future!

[jim]

So me and someone at work have been having a discussion about how would be best to invest a hypothetical £50K. My argument is that, given interest rates have been low and are only likely to go up that it would be best to pay off a huge chunk of mortgage. I can't see that banks are ever going to give out more for savings than they take in mortgage or they'd be broke and in the long term surely it's better to clear your debt first before you start investing as surely you're going to pay more money towards maintaining the debt than you are going to get back. His argument is that it would be better invested so at least you can ideally access the capital if you need it and that the right investment should return a decent income. I've seen some ISA things that give you a decent income for low risk and he's looking at how risky it would be to invest in stock markets using this new software which buys and sells pretty quickly.

What do people think?

Based on historical evidence, with a sufficiently long horizon, and based on investments placed in low-fee index trackers that replicate the global markets, you would be best off investing the money unless the interest rate is astronomical.

Average stock market returns are around 6-7% after inflation, whilst a typical mortgage in the UK would be 2-5%, so the former would give you more in the end.

The complication here is that people do not have lives that are this simple. If someone lost their job, and then couldn't remortgage, and the stock market had just taken a tumble, then they might find that they wished they had put the money into the mortgage instead. Nonetheless, as a hypothetical the answer is the stock market.

[TeePee]

Based on historical evidence, with a sufficiently long horizon, and based on investments placed in low-fee index trackers that replicate the global markets, you would be best off investing the money unless the interest rate is astronomical.

Average stock market returns are around 6-7% after inflation, whilst a typical mortgage in the UK would be 2-5%, so the former would give you more in the end.

The complication here is that people do not have lives that are this simple. If someone lost their job, and then couldn't remortgage, and the stock market had just taken a tumble, then they might find that they wished they had put the money into the mortgage instead. Nonetheless, as a hypothetical the answer is the stock market.

This is the right answer.

Mathematically, over the longer period, if no liquidity is required.

Also, remember theres a difference between the gains in the stockmarket and the total return. The FTSE100 pays over 3% in dividends, and this is not included in index price. If the price is the same at the end of the year as at the start, you still make over 3%.

Many people have this obsession with debt as a bad thing. It can be, and if you're carrying credit card debt at 20% or more, it is, but properly managed debt is a tool, which can be used to your advantage.

[badass]

It is almost always the case that paying off debts is usually the first thing you should do unless your investment generates a greater return than the cost of servicing the debt.

And there are lots of factors to consider - the investment risk being one, and how much you can afford to lose if a high risk investment turns bad (generally the higher the potential return, the greater the risk)

Another is the period of time you are prepared to invest. House prises tend to rise, but there are short term peaks and troughs - the same goes for stocks and shares - even if you are prepared to actively manage your portfolio intelligently!

It is also a good idea to keep some cash on deposit for those emergency rainy day occurrences.

Correction there.

[philehidiot]

So given this is totally hypothetical, allow me to share some more hypothetical details.

He invested a small amount as a test into an app called Vanguard and made 2% in 48 hours. The then also invested a similar amount into an "ETF" which I know nothing about and lost 6% overnight. The average return on the ETFs he was investing in was 6-8% over a much longer term.

I think the other issue is risk. I'm very risk averse with my hypothetical £50K and he's a little less so.

As for giving some more details... the mortgage is fixed for another year as it was put on a short term whilst me and the missus mooved in together and established our finances properly. Therefore in a year I can put in as much as I like when we re-mortgage. The other issue is Brexit and not knowing what is going to happen to the stock market when we leave. Hopefully nothing / a massive increase. Buuut I suspect a drop followed by a slow recovery as confidence is regained is more likely. I also expect interest rates to rise. I'd want the cash to remain liquid and I'd really, really not want to lose it. Hypothetically, I could pay off around half the remaining mortgage, leaving around £50K to repay. Halving mortgage payments (or overpaying and being mortgage free before I'm 40) would be very tempting.

With that data, anyone have any investment ideas or advice?

[jim]

So given this is totally hypothetical, allow me to share some more hypothetical details.

He invested a small amount as a test into an app called Vanguard and made 2% in 48 hours.

Vanguard is a fund manager, so the statement doesn't mean a lot. It's a bit like me saying "I put some money in Barclays", without explaining which account.

The then also invested a similar amount into an "ETF" which I know nothing about and lost 6% overnight. The average return on the ETFs he was investing in was 6-8% over a much longer term.

An ETF is an exchange traded fund. It's just a type of investment fund, but can hold a huge variety of investments. Yes, they can lose 6% overnight. You can't try to predict the growth of an "ETF" because that could contain any type of investment.

I think the other issue is risk. I'm very risk averse with my hypothetical £50K and he's a little less so.

Risk averse tends to mean investing will be trickier. It is higher risk than cash investments.

As for giving some more details... the mortgage is fixed for another year as it was put on a short term whilst me and the missus mooved in together and established our finances properly. Therefore in a year I can put in as much as I like when we re-mortgage. The other issue is Brexit and not knowing what is going to happen to the stock market when we leave. Hopefully nothing / a massive increase. Buuut I suspect a drop followed by a slow recovery as confidence is regained is more likely. I also expect interest rates to rise. I'd want the cash to remain liquid and I'd really, really not want to lose it. Hypothetically, I could pay off around half the remaining mortgage, leaving around £50K to repay. Halving mortgage payments (or overpaying and being mortgage free before I'm 40) would be very tempting.

You can't predict what will happen after Brexit - don't kid yourself that you can, it is a path to bad decision and suffering.

With that data, anyone have any investment ideas or advice?

Not a chance. Anybody giving you investment ideas or advice is (probably) lying or themselves clueless. To genuinely recommend investments is a highly regulated industry for a reason.

That said, my only recommendation would be to read Smarter Investing by Tim Hale http://amzn.eu/d/49dxY0s

If you understand what is going on with investing, you can make more informed decisions. And that also means that you can have a reasonable, informed and meaningful discussion on the matter of investing.

[philehidiot]

Vanguard is a fund manager, so the statement doesn't mean a lot. It's a bit like me saying "I put some money in Barclays", without explaining which account.



An ETF is an exchange traded fund. It's just a type of investment fund, but can hold a huge variety of investments. Yes, they can lose 6% overnight. You can't try to predict the growth of an "ETF" because that could contain any type of investment.



Risk averse tends to mean investing will be trickier. It is higher risk than cash investments.



You can't predict what will happen after Brexit - don't kid yourself that you can, it is a path to bad decision and suffering.



Not a chance. Anybody giving you investment ideas or advice is (probably) lying or themselves clueless. To genuinely recommend investments is a highly regulated industry for a reason.

That said, my only recommendation would be to read Smarter Investing by Tim Hale http://amzn.eu/d/49dxY0s

If you understand what is going on with investing, you can make more informed decisions. And that also means that you can have a reasonable, informed and meaningful discussion on the matter of investing.

This sounds like wizzened owl advice. Cheers.