Taking out capital from an Investment bond or Building Society

The bond may well go up, but in a couple of months? I very much doubt it.

This decision has to be based on how quickly you think the values will increase. Who knows? At the moment you would be selling at a loss, but this might be the least loss if you left it a while.

Rob Graham

Thanks Rob. If I understand you you're saying that it might be a good idea to not cash in a part of the bond each month as it's possible the fall may have bottomed out? How about the comparison with the Building Society though - the value of the cash account is going up by the rate of interest, say 6%. Wouldn't the increase in the value of the bond have to at least match that to be worth keeping?

Yes.

How about the comparison with the Building

Yes, it would. However, the two investments are different animals and the bond investment will go up and down. You have to hope that it will go up more than down, and that the average growth rate exceeds 6%. There's no telling whether this will be true. Anyone who invests in shares has got to be assuming that his investment will rise more than it would in a deposit account. Sometimes he'll be right, sometimes not. In your case I've no idea whether the rate of growth will exceed 6% and if it does, when. This has to be a decision for you to make, based on inspired guesswork.

You may, of course, feel that a switch into other funds might be a good idea. You don't need to encash the bond then, just switch funds. Although this means selling the units in the fund you're in at a loss, you'll probably be buying other units that are depressed as well (e.g. equity funds), and they may recover faster. But I don't know what funds you're currently invested in.

I also come back to the IFA's statement that the funds will recover in a couple of months. I wish I could be so confident!

Rob

Thanks Rob. To me, my argument, that the Building Society is a better bet than the bond and that while selling the assets which make up the bond while they are low in value is unfortunate it's better to take the money out of the bond, which has fallen in value over the last year, than to take it out of the capital in the building society account, which has gone up by their rate of interest.

The IFA just reads from a script, in my opinion. She didn't like me keeping money in the Building Society, but it's turned out better than the bond.

So be it. There's really no answer to this one. Time will tell which was the better bet, by which time the damage will have been done. It all depends on the future performance of your bond (or what would have been the performance if you'd left it there).

Rob

The point remains that the effect on the fund's future value of taking out a fixed lump sum depends on how much growth is expected between the time of extraction and the future reference point.

Suppose you have a certain amount sitting in an up-and-down fund, and that 3 years later it is worth 120% of its original value. But suppose that the value graph goes to 120% in year 1, then back down to 100% in year 2, and back up to 120% in year 3.

If you take out £1000 at the end of year 1, then at year 3 the fund will be worth £1000 less than it would have been if you had not taken the money out (because at both year 1 and year 3 the fund is sitting at 120% of its year 0 value). But if you take £1000 out at year 2, then by year 3 the fund will be worth £1200 less than if you'd left it in (because between year 2 and year 3 the fund grew by 20%).

Therefore it's always better, when taking money out of a fund to do so when it is high, and to put money in when it is low.

The IFA may be thinking (and may well be right) that the fund is low just now (relative to a long term average), and even if it hasn't yet bottomed out, it is likely that it will grow more in the short-to-medium term, relative to its present value, than your BS account will over the same period. That being the case, it would be better to take the money out of the BS than out of the fund.

If he says such things then he's using either magical foresight or else the smoke and mirrors that most IFA's use all the time.

It's a market. At any one time the number of buyers is roughly the same as the number of sellers. A preponderance of one over the other affects the price and makes it so.

With all shares, bonds, funds etc, the price is what it is now, at which the buyers and sellers are equally divided about their prospects. It follows that they could go up, they could go down. The important bit is that the likelihood of both is exactly the same, and anyone who claims to know differently in advance is a charlatan.

The truth is, it isn't worth worrying about it because it's not something you can control or even predict. Toss a coin and be done with it.

Rubbish. OK, the way the markets work is - to most people - shrouded in mist, but you don't need magic to observe that the long term trend in share prices is not only up, but up faster than deposit savings go up. Thus share prices are subject to a kind of inverse gravity law: what comes down must go up.

Would you say nine years is 'long term'?

The fact is that the FTSE 100 index at the end of 1999 stood at 6930. Now, it's less than 5000, and would require something like a 40% rise to regain the level it reached then.

On the other hand, a cash deposit at, say, 6% per annum since then would have increased by nearly 70%.

It could be, but I said *trend*, it's not just a case of picking two dates an arbitrary time apart, and measuring from a high to a low hardly presents a fair picture.

Except that a "6%" deposit is really a 4.8% one, so it's more like 52.5%.

Actually it's in an ISA so it's 6%

e:

It's a fair picture of what has happened between then and now or, if you prefer, what has happened 'this century' so far.

To demonstrate a long term rising trend, what should happen is rising highs, or rising lows, or rising means. I've no idea on what basis you would claim there is a long term rising trend, but it certainly isn't apparent from the highs of the FTSE graph since 1999. It's never been higher this century than it was at the end of the last, and it would currently need to increase by a massive 40% to get back to that level. Perhaps you'd give us your estimate of when that is likely to be. 5 years? 10? 20? Until it happens, anyone who invested in shares before the beginning of 2000 is massively down on what their portfolio was worth at that time. It's quite conceivable that they will have to hold their shares for 15 or 20 years before they regain their previous value. Compare that with a cash deposit, even earning 4.8% net compound per annum, and shares look very sick indeed.

And shares involve dealing charges, IFAs' commissions and annual fund fees.

Yes, shares do involve dealing charges and stamp duty, but annual charges and IFA commision are optional. Annual management charges apply only if you choose to hold your shares through the vehicle of a managed fund, and IFA commission only applies if you optionally involve an IFA in the purchase.

You forget that shares also pay dividends, which are the principal reason why people invest in them. If the shares fluctuate in value over and above that, well, that just adds a layer of excitement, a secondary reason.

Business needs seed money in order to function, and the only way to get it is to borrow or to issue shares. Businesses doing well is the source of wealth with rewards the investors (be they shareholders or lenders). If overall long term returns from the combined effects of dividends and rising share values did not exceed the returns from the "safer" option of investing only in savings deposits, then people simply wouldn't invest in shares. But they do, and therefore shares

Well when it comes to bonds you have to remember it has a fixed rate of course but there are other advantages investing in bonds. They are considered low risk.

No, it's not that sort of bond - here it's a wrapper for all sorts of investments, shares, fixed rate bonds etc