Closest-to-cash in a shares ISA?

Corporate bond funds. These are low risk (but not 'no' risk), and at the moment some are delivering in excess of 10% income pa. If in an ISA this is therefore tax-free, and by tax-free I mean totally tax-free, unlike other types of stocks and shares ISAs where the tax on the dividends cannot be reclaimed.

Rob Graham

I would point out that if interest rates rise, the value of corporate bond funds generally falls, and that if interest rates fall, their value generally rises.

Given that the only way interest rates can go at the moment is up, the only way corporate bond funds can go is down.

While there's a small amount of risk in the income, there's short term risk in that the price may fluctuate.

Anyway, you /can/ hold cash in a shares ISA. Just any interest accrued will have tax deducted. (Does this still happen if you don't earn enough to pay income tax?)

Theo

I seem to remember reading recently that any low risk component mustn't guarantee more than a 95% return of the investment.

I suspect the public policy behind the cash ISA rules is about encouraging people to make medium risk investments, probably partly because it increases ownership of the means of production by ordinary people and partly because they should get better lifetime returns.

While I don't doubt the veracity of this, some funds have an element of ordinary shares in them which will help to negate the effect of rising interest rates on the capital values. And having this mix ensures that the interest is still eligible for full tax relief as if it were a cash ISA.

Rob

That's when all other things are equal. Over the last 8 months or so corporate bond prices have been falling heavily despite falling interest rates. There's a lot of risk of default built into the current prices, many people are saying too much risk built into the price so there's a reasonable chance they'll rise...

Prices will be affected by the state of the economy more than interest rates.

Well of course there is. It's a market. That means that there is always a close balance between the number of buyers and the number of sellers at the current price. If there isn't, the price rises or falls until there is. That means the number of people thinking that they're a good buy equals the number who think they're a good sell, so there is never any consensus on whether they'll rise or fall from where they are. There is a 50% chance they'll go up. There's also a 50% chance they'll go down.

Why this simple truth seems so difficult to grasp, I'll never know. Sometimes I think it's just those with money to gain from churn who say anything different. But they're charlatans if they do.

Unless it's already factored into the price of course, which it inevitably will be, given that it's a free market.

Short dated gilts.

You know exactly what they will be worth at the end of the term and the price is gets closer and closer to that as you get near that term date.

Robert

No. You make the mistake of assuming that all buyers/sellers are making the decision to buy/sell because they think it's a good idea, rather than their decision being mandated by their investment policy.

Eg if the managers of a tracker fund which tracks the FTSE100 sees company X drop out of the FTSE100 index, and company Y enter it to replace it, what do they do and why? Also insurance companies have to maintain prescribed asset ratios which can mean they are forced to sell investments, whether they think it's a good idea or not. And probably the most significant - how much money there is to invest.

Because it's not that simple. You stick with your pin.

No, it doesn't necessarily work this way. There may be a million sellers and just one buyer who takes the lot. This situation infers that most people think the market will go down but one person (or institution) thinks it'll go up.

Rob

Can you quote any example of that?

No, thought not.

If it did, though, what would happen is that the price will change as the million sales proceed. If no buyers appear, the price will plummet after just a few of the sales have happened. It's a self-regulating mechanism.

Yes. Of course.

And their investment policy will be dictated by whether they think the individual products or the sector they're in are a good buy or a good sell, which amounts to the same thing

They sell X and buy Y of course. But that's because others will be doing likewise, meaning that X is going down and is therefore a good sell whereas Y is going up and is therefore a good buy. All of this is factored into the price.

And all of this is factored into the prices. Can't you see that?

It _is_ that simple. And until anyone has convincing proof otherwise, I will stick with my pin. There's no better way.

Except of course to avoid all investments that may go down as well as up, as I've also advocated for several years now.

Where was the FTSE 100 in December 1999? Oh yes, here it is: 6930. What is it now? About 3930. Only a 76% rise needed then and we'll be back to where we were nearly 10 years ago.

Not necessarily. External factors, eg FSA rules come into play.

But the tracker funds are just following, ie multiplying that sentiment without actively assessing that Y is now better than X.

Is it bollox. If people are selling because they are forced to then the market is lower than it would be if people were selling because they chose to.

Really? You were advocating trackers in the last couple of years IIRC.

You seem to be hung up on that particular date. Is that when you bought your tracker?

But I'm not sure you can put short dated gilts in an ISA.

I was trying to show an example - OK a bit extreme - of how the market is not divided 50/50 as you suggest. Anyway I'm sure you can't show an example of this ratio in practice, so we are only discussing a theory.

Rob

No-one can do that. And it depends on the price anyway. But the point is that the devisors of the tracker fund have made a conscious prior decision that shares rising to the index are intrinsically better to own than those falling from it. Which they are. So, they're not actually evaluating their true worth from scratch using the smoke and mirrors that fund managers do, but are following a tried and tested automated procedure, thereby saving themselves a lot of wasted effort and their clients a lot of money.

But there will be similar number of insurance companies in the market to buy.

Only in preference to managed funds, which they beat three times out of every four. For a long time now I've actually preferred cash

No, I'm in cash deposits. I chose the time because it's a view of what has happened this century rather than last, and undoubtedly covers the 'long term' over which all financial advisors said that shares should be held to make a substantial profit.

I believe that no-one has suffered any penalty from holding cash in ISAs or their forerunners, PEPs. I've held sizeable cash balances for ~6 months. The manager sends you a letter notifying you of the rules, to discharge their responsibility.

If your satisfied with just preserving your wealth, you could invest in a matching long & short or similar with currencies. You'd need a flexible ISA or else use ETF/ETCs.

Note graph at bottom for corporate bond funds -

Yeah yeah, we've had this discussion before...nobody can possibly better than average in judging what's a good buy or sell... you carry on believing that.

But it's too late to cash in on that once they've risen because the price now reflects that fact that it's better. It's better to buy them before they rise. But any fund manager that chose such a share before it rose would be pure guesswork in your warped little world where nobody can possibly be better than average...

Yeah, buy the share *after* it's risen and once the "true worth" is already priced in. Great strategy.

They won't be *forced* buyers, will they? The market price reflects the price where there are 50/50 buyers/sellers, if some of the sellers are *forced* then the price will be lower than if every buyer/seller was willing. It's blatently obvious.

Oh really? So you spend a long time arguing about managed fund vs trackers when you're not really interested in either? Do you spend a long time arguing about lemon vs strawberry cheesecake when you don't really like cheesecake?

You chose it because it's a peak which suits your bullshit argument. "All financial advisors" do not recommend investing a lump sum at the same time, any decent one would advise investing over a period of time so peaks/troughs are smoothed.

No, that's not so. 50% of people who buy or sell will be right (ie better than average), some of them spectacularly so. The other 50%, however, will be wrong, some of them spectacularly so also.

Some people who buy or sell will be right 10 consecutive times. Is this just chance, or do they have some magical system? Human nature and financial advisors, being what they are, would like to believe that it's a magic touch, and that the person concerned is a financial genius. But it's not. It really is just chance, exactly as it would be just chance if someone tossed a coin heads ten times in a row. There is absolutely no statistical evidence to the contrary, nor any proof that anyone has a foolproof strategy to continue any success that he has had so far.

Of course the best strategy is to buy things that are going to go up. Unfortunately, until there is 'information' that they are going to go up, eg an indication that the company will join the FTSE 100 index, there is no way of telling, and it's pure guesswork. Once the information is out of course, everyone who is not an insider dealer will have it, and the price will reflect it.

Where's the harm in that? I thought this was a discussion forum.

Anyway, I can only argue with people when there are people willing to be argued with.

No, that would be pointless, as it's all subjective. The difference between trackers and managed funds isn't.

Yes, it was a peak time too. Anyone who was invested over that peak, following the standard advice at the time (as now) to invest long term, would by now have seen their investments fall so that they now need to rise by 75% or so to get them back to where they once were. Long term is rapidly becoming 'a lifetime' wouldn't you say? And there's no guarantee even then.

Well, that's an admission that they haven't any idea at all which way the market will move. So, they all herd together and become averagely poor. What an investor wants, however, is an advisor who knows when the market or a particular investment is going to go up, so that you can get in at the bottom. You seem to think they can do that, even though they never do. I think they can't.