My oldest daughter will be heading to university next September. What's the best investment plan to ensure that I can finance her studies?
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I'm concerned that if tuition fees rise, I'll struggle to pay them for her and for her two sisters when they are old enough to go. I need an investment plan that gives a high return but is relatively low-risk. Does such a thing exist??
poppy68
2 years ago
anony365mous
answered 2 years ago
No. If something like that existed everyone would be doing it. Instead vote the Tory idiots out. They will bankrupt you and your child. They will be the NINJA generation, no income, no job or assets.
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Expert Financial Adviser Answer
James Brooke
answered 2 years ago
You do not say how old your other two daughters are and therefore I have no idea of time scale. The longer the time the scale the more you may want to consider taking some risk because the variablilty of returns, (volatility) reduces with time. However, it is important to remember that the range of outcomes and therefore the risk increases with time.
Sadly, there is no investment plan that give a high return with relatively low risk. Risk and return are closely related. Some structured products purport to give the high returns with low risk, but all you have done is to swap market risk for counterparty risk and, if the counterparty goes bust, you may have lost all of your money rather than just some.
I would have thought that a well constructed portfolio of low cost, index tracking, investments could be what you need. This would be predominantly in fixed income assets and you would want them to be index linked and of short term duration to avoid inflation and interest rate risk as much as possible.
Speak to an Independent Financial Adviser.
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Sadly, there is no investment plan that give a high return with relatively low risk. Risk and return are closely related. Some structured products purport to give the high returns with low risk, but all you have done is to swap market risk for counterparty risk and, if the counterparty goes bust, you may have lost all of your money rather than just some.
I would have thought that a well constructed portfolio of low cost, index tracking, investments could be what you need. This would be predominantly in fixed income assets and you would want them to be index linked and of short term duration to avoid inflation and interest rate risk as much as possible.
Speak to an Independent Financial Adviser.
poppy68
answered 2 years ago
They are 16 and 12, so we'll need to be thinking about the next round pretty soon. This is a helpful first step, thank you. Will look into some index-linked products and may call on you again!
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petematthew
answered 1 year ago
I would take issue with James' comment above that 'the range of outcomes and...risk increases with time'.
Time in the market actually reduces the risk and narrows the range of likely outcomes. This makes sense when you think about it: If you hold an investment for one year, you are hoping that that year is a good one. If you hold an investment for ten years, there is a greater chance that any bad year could be covered by some good years. While the reverse is also true, history shows us that over time real assets, that is shares, bonds, property etc, will perform better than cash.
In a minute I'll be uploading a video which explains the link between risk and reward in more detail.
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Time in the market actually reduces the risk and narrows the range of likely outcomes. This makes sense when you think about it: If you hold an investment for one year, you are hoping that that year is a good one. If you hold an investment for ten years, there is a greater chance that any bad year could be covered by some good years. While the reverse is also true, history shows us that over time real assets, that is shares, bonds, property etc, will perform better than cash.
In a minute I'll be uploading a video which explains the link between risk and reward in more detail.
Expert Financial Adviser Answer
Pete Matthew
answered 1 year ago
Hi again Poppy
As is so often the case with written answers, the devil is often in the detail of what was left out. As such, my answer needs clarifying. I can see no way to retract the answer completely, so I am writing again to amend it.
James Brooke, who answered your question first, has kindly called me and has put me straight, particularly concerning his statement that 'the range of outcomes and therefore the risk increases with time'. He is absolutely right about this.
My over-zealous comment was meant to re-iterate James' earlier comment that there are benefits in taking more risk if the timescale is longer, but I should not have extended beyond that.
It just goes to show that even so-called experts need to be humble and accept that they don't know everything. Apologies to you for any confusion; I refer you back to James' first comment.
Thanks to you James for putting me right in such a professional manner.
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As is so often the case with written answers, the devil is often in the detail of what was left out. As such, my answer needs clarifying. I can see no way to retract the answer completely, so I am writing again to amend it.
James Brooke, who answered your question first, has kindly called me and has put me straight, particularly concerning his statement that 'the range of outcomes and therefore the risk increases with time'. He is absolutely right about this.
My over-zealous comment was meant to re-iterate James' earlier comment that there are benefits in taking more risk if the timescale is longer, but I should not have extended beyond that.
It just goes to show that even so-called experts need to be humble and accept that they don't know everything. Apologies to you for any confusion; I refer you back to James' first comment.
Thanks to you James for putting me right in such a professional manner.
Expert Financial Adviser Answer
James Brooke
answered 1 year ago
Pete,
Thanks for that.
I'm glad to see that you realise the confusion you could have inadvertently caused about this issue and that you do indeed agree with me that the range of outcomes increases with time.
We need to remember that it is the outcome that the investor gets and has to live off that matters, not the average of the range of returns over the period of time of the investment.
If risk were simply volatility of returns then it would be correct to say that this reduces with time, however if risk is viewed as the volatility or uncertainty of accumulated wealth, or what I would call outcome, then suddenly risk increases with time.
Furthermore, if risk is viewed as the impact of a shortfall in wealth, as it would be in saving for the university fees in Poppy's question for example, then not only does risk increase over time, but most measures of risk tend to further understate just how severe a 'bad' shortfall can be and how longer time periods increase the opportunity for ever more severe shortfalls, especially when they are compared to an alternative such as just investing in a 'risk free' asset.
It would be correct to say that the range of the average annual compound growth rate or return reduces with time, but this is very different to the range of outcomes that the investor could experience.
So, by risk I mean the possibility of a worse than expected outcome and, as I will show, the range of outcomes is greater as the time increases so the possibility of a worse outcome increases with time (as does the possibility of a better outcome), so the 'risk' the investor experiences increases with time.
For example over the long term of 54 years for which we have reliable data (1956 to 2009 inclusive) the average return from UK equities is about 12%.
The real (less inflation) return from UK equities is about 6%. Remember, it is the real rate of return that the investor can 'eat'.
However, the range of real returns in any one year over that period is from PLUS 101.3% (in 1975) to MINUS 59.4% (1974 and that was after a real loss of 35.5% in 1973).
To recover from a real loss of 59.4% you need a return of 146.31%, which is 45% more than has ever been achieved in the last 54 years.
Yet, on average from 1974 to now the real return from equities has been 6.7% per annum.
This means that the difference between the 'expected' return on a £100 investment in 1974 and the actual outcome is £14 or 14%.
From 1973 it is even worse. The actual real outcome was that £100 invested in 1973 became £516.68, but the expected outcome, given that the average return over the period was 5.2% per annum real, was £652.50, so in real terms after adjusting for inflation, the investor was £135.81 pounds worse of on their investment of £100 than an adviser would be telling them if the adviser was to say that equity investing outcomes or risk reduces with time.
Clearly, if we picked different start and end years the result would be different, but the point remains that the range of outcomes or results increases with time rather than decreasing. If it is the outcome or result that matters to the investor, which I would suggest it is, then an increased range of outcomes would indicate an increased risk would it not?
I'd like to see a financial adviser try and justify that kind of error in advice to the Financial Services Authority or any other regulator.
For a more detailed and better explanation than I can give here see
www.kitces.com/assets/pdfs/May_2010_Kitces_Report.pdf
"Is stock Investing Really Less Risky In the Long Run?"
By Michael Kitces
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Thanks for that.
I'm glad to see that you realise the confusion you could have inadvertently caused about this issue and that you do indeed agree with me that the range of outcomes increases with time.
We need to remember that it is the outcome that the investor gets and has to live off that matters, not the average of the range of returns over the period of time of the investment.
If risk were simply volatility of returns then it would be correct to say that this reduces with time, however if risk is viewed as the volatility or uncertainty of accumulated wealth, or what I would call outcome, then suddenly risk increases with time.
Furthermore, if risk is viewed as the impact of a shortfall in wealth, as it would be in saving for the university fees in Poppy's question for example, then not only does risk increase over time, but most measures of risk tend to further understate just how severe a 'bad' shortfall can be and how longer time periods increase the opportunity for ever more severe shortfalls, especially when they are compared to an alternative such as just investing in a 'risk free' asset.
It would be correct to say that the range of the average annual compound growth rate or return reduces with time, but this is very different to the range of outcomes that the investor could experience.
So, by risk I mean the possibility of a worse than expected outcome and, as I will show, the range of outcomes is greater as the time increases so the possibility of a worse outcome increases with time (as does the possibility of a better outcome), so the 'risk' the investor experiences increases with time.
For example over the long term of 54 years for which we have reliable data (1956 to 2009 inclusive) the average return from UK equities is about 12%.
The real (less inflation) return from UK equities is about 6%. Remember, it is the real rate of return that the investor can 'eat'.
However, the range of real returns in any one year over that period is from PLUS 101.3% (in 1975) to MINUS 59.4% (1974 and that was after a real loss of 35.5% in 1973).
To recover from a real loss of 59.4% you need a return of 146.31%, which is 45% more than has ever been achieved in the last 54 years.
Yet, on average from 1974 to now the real return from equities has been 6.7% per annum.
This means that the difference between the 'expected' return on a £100 investment in 1974 and the actual outcome is £14 or 14%.
From 1973 it is even worse. The actual real outcome was that £100 invested in 1973 became £516.68, but the expected outcome, given that the average return over the period was 5.2% per annum real, was £652.50, so in real terms after adjusting for inflation, the investor was £135.81 pounds worse of on their investment of £100 than an adviser would be telling them if the adviser was to say that equity investing outcomes or risk reduces with time.
Clearly, if we picked different start and end years the result would be different, but the point remains that the range of outcomes or results increases with time rather than decreasing. If it is the outcome or result that matters to the investor, which I would suggest it is, then an increased range of outcomes would indicate an increased risk would it not?
I'd like to see a financial adviser try and justify that kind of error in advice to the Financial Services Authority or any other regulator.
For a more detailed and better explanation than I can give here see
www.kitces.com/assets/pdfs/May_2010_Kitces_Report.pdf
"Is stock Investing Really Less Risky In the Long Run?"
By Michael Kitces