Annie, who has asked us not to use her real name, is currently renting in London.
The 27-year-old recently received a £10,000 windfall and wants to invest the sum to help buy her first property in three year’s time.
Annie has £1,000 in a Help to Buy Isa and a modest amount in a basic savings account that she’s ring-fenced for rainy days.
‘As a big fan and regular reader of your columns I have plucked up the courage to do something with my money and have been looking at very broad investment trackers as a place to start,’ she said.
She also wants to take a punt by investing a fraction of her windfall in cryptocurrency, or another high risk investment.
So what should Annie do to achieve her goals?
Annie wants to buy her first home and has had a £10,000 windfall she’d like to invest to help her do so – but is investing over three years wise?
Annie’s savings and investments
Risk appetite: High
Time horizon: Three years
Investment trusts and ETFs: No
Cash: £1,000 in Help to Buy Isa. Small amount in basic savings account for rainy day
Premium bonds: None
Myron Jobson, of This is Money, replies: The first thing you should think about is putting money in a Lifetime Isa before the government retracts it, as has been suggested it may do.
Savers between the ages of 18 and 39 can put up to £4,000 a year in a Lifetime Isa and gain a 25 per cent government top-up paid monthly into their account.
So £10,000 would turn into £12,500 after the government top-up has been factored in.
An instant 25 per cent return on your money is not to be sniffed at.
There are only seven lifetime Isas on market – six of them are stocks and shares accounts. The solitary cash Isa product is offered by Skipton Building Society, paying an annual interest of 0.75 per cent.
What about the Help to Buy Isa?
Both the Lifetime Isa and Help to Buy Isa offer a 25p bonus from the government for every £1 saved, but there are some key difference.
For many people, the Lifetime Isa is the better option because you can put more away each year through the Lifetime Isa and earn a larger government bonus as well as buy a more expensive property.
But it is important to remember that you can only withdraw funds in a Lifetime Isa once the account has been open for a year, while you can use your Help to Buy Isa money once you’ve saved £1,600.
What’s more, a 25 per cent charge is levied on cash or assets withdrawn from a Lifetime Isa if they’re not used for the purchase of your first home
For more information about how the two products compare, click here.
You’ve explicitly stated that you’d like to invest the sum but you should give some serious consideration to taking out a cash Lifetime Isa instead.
This is because, as a rule of thumb, investments should be held for five years at the very least to allow enough time to ride out the inevitable ups and downs in the market for a smooth return.
This is not to say you won’t be able to make money over three years.
There are many investment funds that boast an impressive three-year record.
The problem will be if markets head south and you need to sell out in a downturn.
The reason a five-year horizon is often suggested is that past evidence shows this should give an investor time to recover from most slumps.
Of course, there’s no guarantee that would be the case and longer time periods than this buy you even more leeway.
A lifetime Isa could work well as you specifically say you want this money for your first home.
However, it’s important to flag that a 25 per cent charge is applied on cash or assets withdrawn from a Lisa if they’re not used for your first foray on the housing ladder, if you’re not aged 60 plus, or terminally ill with less than a year to live.
To give more of a steer, we’ve asked a chartered financial adviser for guidance. Here’s what he said.
Ray Black is managing director of chartered financial advisory firm Money Minder Financial Services writes: Annie has a very clear objective for her windfall money; she would like it grow and then use it towards a deposit for her first property.
While this objective is unlikely to be written in stone, (her circumstances could change) it’s helpful that she has an understanding of when she wants to spend the money.
This will help her to make an informed choice about how she might invest and the risks that she needs to consider.
Investing the money
Annie said she likes the idea of investing this money into a tracker fund, because they are low cost. However, there are two very important things for her to consider first.
The first is just because something is cheap, it doesn’t make it the best option.
Many tracker funds are essentially computer based investment programmes that aim to emulate an index, like the FTSE 100. This means they will follow an index when it’s going down, as well as up.
A good FTSE 100 tracker fund would have been very rewarding for Annie if she invested a lump sum 10 and five years ago. The index grew by over 100 per cent and 40 per cent over these periods respectively.
However, had she invested her money in mid-January 2018, by mid-March she’d have been down by almost £1,000 and, even though the UK stock market has recovered since March, she’d still be down by around £100 in early August.
Secondly, generally speaking, stocks and shares based investments are considered when there is at least a five-year time span before the money will be needed.
Advisers will therefore feel uncomfortable recommending this approach for anything less.
Before Annie makes her final decision, she should reconcile with the fact that she may end up with less than what she started with in three years’ time if she invests.
She needs to consider how much of a difference this might make to her situation and if she would be happy to put off buying her first home in the hope that the value of her investment would go up again over time – although there’s no guarantee that would happen.
If Annie isn’t comfortable with the investment risk, she should remain in cash.
Investing in cryptocurrencies
Annie also suggested that she likes the idea of investing in cryptocurrencies. In my opinion, this is the highest risk investment strategy she could take with this money.
On December 18th 2018, one bitcoin was worth nearly $19,000. However, by 7th February 2018 one bitcoin was worth just under $7,000.
To put this in to context, it would represent an initial £10,000 investment dropping in value to less than £4,000 within 9 weeks.
Some might argue that bitcoin has dropped so much in value that at the current price it’s a good investment opportunity.
However, cryptocurrencies are still unregulated in the UK, which means that there is no protection for the investor.
That makes this option very high risk. For money that is so important to Annie’s house purchase dreams, I would not recommend it.
Ray Black is managing director of chartered financial advisory firm Money Minder Financial Services
Investing her money into a Lifetime Isa provides Annie with some very attractive government sponsored bonuses.
Annie might want to consider transferring her existing £1,000 in her Help to Buy Isa to a Lifetime Isa and add an extra £3,000 immediately from her £10,000 windfall.
After April 5th 2019, she can add another £4,000 and she can put the remaining £3,000 in the following year.
Within two years, she will have accrued an impressive £2,750 in government bonuses to go towards her house purchase.
Irrespective of the growth made whilst invested, this will provide her with a deposit of at least £13,750.
Investment vs cash Lifetime Isa
Unfortunately, there is only a one cash Lifetime Isa available and the interest rates are low (under 1 per cent). However, if Annie wants to avoid risk, it is still the right thing to do.
Once the first £3,000 of her £10,000 windfall has been invested, with the remaining £7,000 she could open a Santander 123 account (which offer 1.5 per cent monthly plus cashback on bills) while also saving the maximum monthly amount (£200) into a one-year Santander regular savings account paying 5 per cent interest.
The alternative is investing in a stocks and share Lifetime Isa. Annie stated a preference for a tracker because they tend be low cost. She could consider investing in a UK tracker like the Vanguard FTSE UK Equity Income Fund .
As mentioned before, the goal of a tracker is to replicate the performance of the given index but they never do when fees are factored – no matter how cheap the charges are.
I’d suggest an actively managed fund instead. The goal with an actively managed fund is to beat the market, however, not all do.
The Artemis Monthly Distribution fund, for example, is less volatile than a FTSE tracker (that helps to reduce the investment risk) and over the last three years has provided a higher return than the FTSE 100.
It’s important to point out that past performance is not a guide to future results.
Either will provide Annie with a relatively simple investment solution. However, it might also provide her with growth over the next three years – again not guaranteed.
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