7

I'm a software engineer in London, UK. I just turned 27. The past 5 years, I have put as much as I can into paying off my student loan (that is from another country) and have only just cleared the entire loan amount. I am able to save around £800 - £1000 a month now, after all the expenses.

Few of my friends have bought houses with mortgage, and are seem to be doing rather well, with most of them renting out spare rooms. I don't quite understand a lot of how stock markets and trading etc works, but I'm hesitant to invest in stocks for the fear of losing everything.

My flatmate thinks this is a terrible time to be buying properties in the UK and his explanation to that is the UK property market are absurdly high and will be crashing a lot very soon. Admittedly, he's been saying that for the past 4 or so years I've known him and it's yet to happen now. He quotes a lot of references from a lot of people I have never heard about. He works as an accountant for NHS so I presume he understand finances a lot more than I do, after all, I understand computers way more than he does. He's trying to get me to invest in Gold and Silver (but mostly silver), but I neither know anything about gold or silver, nor know anyone who takes this approach.

At 27 (not particularly young), What is the best way to go about investing / saving up with the intention of:

  • Making some extra income each month - either by rents, interests, dividends, or by any other means, (to help me save more...)
  • If possible, have medium term commitment

Is buying a property now with the intention of selling it in a couple of years for profit (and repeat until I have substantial amount to invest in something big) a bad idea? If it is, what else can I safely invest in?

Thank you

  • 2
    As we have recently seen in the US, property prices do not always increase. – keshlam May 26 '15 at 19:01
  • 2
    Why not get yourself educated in investing and then decide for yourself what is best for you. Either that or go and pay a Financial Planner for some proper advice. – user9822 May 26 '15 at 21:28
  • @MarkDoony +1, I have started reading up about investing and as a beginner, struggling to find a good place to start. Based on other answers here I've been reading a few blogs and am about to read a book "Get a financial life in your twenties"... but it's always good to get an educated opinion! Thank you – LocustHorde May 27 '15 at 9:03
7

TL;DR - go with something like Barry Ritholtz's All Century Portfolio:

  • 20 percent total U.S stock market

  • 5 percent U.S. REITs

  • 5 percent U.S. small cap value

  • 15 percent Pacific equities

  • 15 percent European equities

  • 10 percent U.S. TIPs

  • 10 percent U.S. high yield corp bonds

  • 20 percent U.S. total bond

UK property market are absurdly high and will be crashing a lot very soon

The price to rent ratio is certainly very high in the UK.

UK Price To Rent Ratio

According to this article, it takes 48 years of rent to pay for the same apartment in London. That sounds like a terrible deal to me. I have no idea about where prices will go in the future, but I wouldn't voluntarily buy in that market.

I'm hesitant to invest in stocks for the fear of losing everything

A stock index fund is a collection of stocks. For example the S&P 500 index fund is a collection of the largest 500 US public companies (Apple, Google, Shell, Ford, etc.). If you buy the S&P 500 index, the 500 largest US companies would have to go bankrupt for you to "lose everything" - there would have to be a zombie apocalypse.

He's trying to get me to invest in Gold and Silver (but mostly silver), but I neither know anything about gold or silver, nor know anyone who takes this approach.

This is what Jeremy Siegel said about gold in late 2013: "I’m not enthusiastic about gold because I think gold is priced for either hyperinflation or the end of the world." Barry Ritholtz also speaks much wisdom about gold. In short, don't buy it and stop listening to your friend.

Is buying a property now with the intention of selling it in a couple of years for profit (and repeat until I have substantial amount to invest in something big) a bad idea?

If the home price does not appreciate, will this approach save you or lose you money? In other words, would it be profitable to substitute your rent payment for a mortgage payment? If not, you will be speculating, not investing. Here's an articles that discusses the difference between speculating and investing. I don't recommend speculating.

  • Hi, got a question, sorry for being thick, I don't think I quite understand the logic when you say, it takes 48 years or rent to pay for same apartment (...) I wouldn't voluntarily buy in that market - if it takes 48 years of rent to cover the cost of home, isn't it better to buy as mortgages average on 25 years? won't you save the 23 or so years' worth of rent? why wouldn't you buy a home? And why does it sound like a terrible deal? – LocustHorde May 28 '15 at 14:02
  • 1
    @LocustHorde having a high price/rent ratio means that sale prices are high when compared to renting. With your assumptions, it means if you buy a house with a mortgage, you will have to pay it all in 25 years but will only get back that much money if you rent it for 48 years. ie. Your return on investment takes a much longer time to even out. – Tayfun Sen May 28 '15 at 14:10
  • Oh I see, so it's return on rent, and not about me paying the rent.. so if it isn't for the intention for selling it, but for myself, would you say it is better to buy a house than to rent? – LocustHorde May 28 '15 at 14:16
  • 1
    @LocustHorde - Here's another way of thinking about "it takes 48 years of rent to pay for the same apartment in London": it is a lot cheaper to rent an apartment in London than to buy an equivalent apartment. If it's cheaper to rent, than why buy? Hoping that prices increase in an asset class that's already valued high is a dangerous game, especially when you're using leverage (e.g. when you are taking out a mortgage and purchasing an asset with borrowed money). – Powers May 28 '15 at 17:04
  • 1
    @LocustHorde - renting can be more cost efficient than buying or vice-versa, it depends on a variety of factors (mortgage rate, length of mortgage, house price appreciation, etc.). The New York Times has an awesome interactive model to help you determine if it's better to buy or rent: nytimes.com/interactive/2014/upshot/… I am almost sure the model will tell you that it's better to rent in London. I think you should ask a new question about how renting can be financially superior to buying because it's an important concept to understand. – Powers Jun 2 '15 at 11:34
12

First of all, bear in mind that there's no such thing as a risk-free investment.

If you keep your money in the bank, you'll struggle to get a return that keeps up with inflation. The same is true for other "safe" investments like government bonds.

Gold and silver are essentially completely speculative investments; over the years their price tends to vary quite wildly, so unless you really understand how those markets work you should steer well clear. They're certainly not low risk.

Repeatedly buying a property to sell in a couple of years time is almost certainly a bad idea; you'll end up paying substantial transaction fees each time that would wipe out a lot of the possible profit, and of course there's always the risk that prices would go down not up.

Buying a property to keep - and preferably live in - might be a decent option once you have a good deposit saved up. It's very hard to say where prices will go in future, on the one hand London prices are very high by historical standards, but on the other hand supply is likely to remain severely constrained for years to come.

I tend to think of a house as something that I need one of for the rest of my life, and so in one sense not owning a house to live in is a gamble that house prices and rents won't go up substantially. If you own a house, you're insulated from changes in rent etc and even if prices crash at least you still have somewhere to live. However that argument only works really well if you expect to keep living in the same area under most circumstances - house prices might crash in your area but not elsewhere.

Not the answer you're looking for? Browse other questions tagged or ask your own question.