How should you invest your downsizing 'windfall'?
Malcolm Small's recent blog on 'downsizing in retirement – what stops people doing it?' came to mind last weekend.
A colleague's mother is in this exact situation. She has a small pot of pension money that gives her enough to live on, but would like some extra cash to enjoy a couple of nice holidays in the next few years.
Having lived in the same house for the past 47 years, there is a decent amount of equity to be had if she chooses to downsize - and also a decent-sized garden and too many rooms to maintain on her own. It seems a logical solution.
However, those 47 years also hold most of her life's memories and she's not the only one to have a strong emotional attachment to the bricks and mortar – her children have one too. Being recently bereaved, selling the much-loved family home is a really hard course of action to take.
She could rent the house out and rent something smaller herself. Although it would still mean leaving the house, it would remain hers and if she hates living somewhere else she can always go back. She could create a reasonable amount of extra income this way, but there are costs and responsibilities involved in being a landlord that need to be considered. Being in a small village there is also the question as to how easy it would be to find tenants. And of course, if she decides to sell at a later date, there could be capital gains tax to consider.
Equity release is also an option, but if she wants to leave some sort of inheritance to her children - which she says she does - it would seriously deplete what they eventually receive.
So, if she can take the plunge and downsize, where should she keep the lump sum she would gain? It could easily be £100,000 or more, which is a decent amount to invest and not one she will want to see decline in value.
Cash accounts are paying 1.1% if you look hard enough, but with inflation nearing 2%, in real terms you are losing money.
Gilts or other government bonds, which would historically have been the next port of call, are looking expensive and corporate bonds, buy and large, are paying out about 3%. Better than nothing, but not great either.
Equity markets are also looking very expensive and I wouldn't suggest for one minute that she invest the lot in the FTSE.
So what's left? In my view it would be a few absolute return or lower risk multi-asset funds. Funds that aim to produce a positive return in any environment (although importantly this is not guaranteed) and which should be less volatile than equities.
My favourites in this space are Church House Tenax Absolute Return Strategies, Premier Defensive Growth and Jupiter Distribution.
The Church House fund invests directly in assets (not funds) and is one of the few in the sector that targets an absolute return from diversification and risk management alone. It does not short sell any securities or indices for downside protection.
The Premier fund invests in assets that share two common characteristics: a predictable return and a defined term. This approach helps insulate the portfolio from changes in market conditions. It's a strategy well suited to delivering low-risk positive returns.
The Jupiter fund is a multi-asset fund with around 70% in fixed income and 30% in equities. The two managers attend company meetings together and decide not only whether or not to invest, but if the investment would be best made via the company’s equity or debt. It is a strong contender for cautious investors.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.