Ask Paul: Should I invest in shares if it's only going to be a for a year?
I am a 35-year-old single female in a stable job. I recently sold my one-bedroom apartment in a capital city.
I am now planning to rent for 12 months before buying a two-bedroom apartment in the hope that the housing market will stabilise in that time.
I will have about $220,000 in cash after my sale goes through. What should I do with this money while I'm renting?
Interest rates on savings accounts and term deposits are not attractive. I looked into government or corporate bonds, but I don't think I can make money off them in 12 months and they offer less flexibility in terms of how long I have to hold them for.
I would not be averse to buying shares, but I'm not confident about which ones are currently good value and are likely to keep or grow their value over the next 12 months.
Last year, after the sharemarket plummeted, I purchased $5000 in Vanguard Australian Shares High Yield ETF (VHY) and $5000 in BetaShares Australian Sustainability Leaders ETF (FAIR). I sold the shares after 12 months, having made almost $4000. I was intending to put the money towards buying a bigger apartment this year, but due to lack of availability and prices in the current market I have changed my plans.
I would consider buying more VHY as they could be expected to provide decent dividends. But I'm not sure if I should only invest a portion of the money or the whole lot, and if this is too risky a move. - Abby
I do love a bit of a chat about risk and return.
And here you have given me plenty of subject matter! I have absolutely no idea what the housing market will do in the next year. The boom over the past two years caught me by surprise.
Obviously, money was going to be very cheap, which fuels a boom. But COVID was a complete unknown. So I thought the market would be pretty flat. Wrong.
You'd have to think that property prices cannot move past the ability of people to pay for them, both in terms of wages and interest repayments. Wages seem pretty stuck and interest rates are moving up, so you'd think prices will stabilise.
I do get your point about the $220,000 you will have.
But investing that in shares for a year makes me nervous. As I look at year-on-year returns over the past 100 years, historically you have a four in five chance of making money and a one in five chance of losing.
The one-year range of returns is more than 60% achieved in 1975 to a one-year loss of nearly 50% in 2008.
The average yearly rate of return over 100 years is more than 10%, including dividends. So I reckon this is your conundrum. Can you live with roughly a historic 81% "one-year" chance of making money in shares and 19% of losing money?
That I am going to leave you to decide. Maybe keeping some in cash and some in shares is worth considering?
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