MTTM Podcast Episode 466 – Investing in Nvidia, Debt to income ratios & funding later life care

Listen to Episode 466

On this week's episode we discuss the skyrocketing share price of Nvidia, the AI chipmaker and its impact on investors' portfolios whether they realise it or not. We also explain how to manage your exposure. We then discuss the importance of debt-to-income ratios for anyone considering a mortgage. Finally, we reveal the significant costs of later life care and talk about strategies and insurance options to ensure you're prepared

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Podcast Episode 466 Summary

Investing in Nvidia

Nvidia, a prominent chipmaker, is primarily known for its significant role in the development and execution of AI products. With the rapid expansion and excitement surrounding AI, Nvidia has become a pivotal player, holding about an 80% market share in AI chips. This dominant position has led to a dramatic increase in its share price, which has risen almost sevenfold since November 2022, and by about 160% in 2024 alone.

The enthusiasm around AI has led some to speculate about a potential bubble, reminiscent of the late 1990s internet boom. During that period, Cisco Systems experienced a similar surge due to predictions about internet traffic growth, only to see its share price collapse when reality did not meet expectations. Investors are cautious that Nvidia might face a similar scenario if AI adoption does not happen as anticipated.

For passive investors, Nvidia's performance is crucial as it now represents around 7% of the S&P 500 index. This means that even if you are indirectly invested through an S&P 500 ETF, you have substantial exposure to Nvidia. In the MSCI All Country World Index, Nvidia accounts for approximately 3.8%. Understanding this exposure is vital for managing your portfolio's risk and performance.

Active investors might look to manage their Nvidia exposure by choosing funds with different levels of Nvidia exposure. For example, typical global equity unit trusts have about 4.2% exposure to Nvidia, while North American equity funds average around 6%. Technology-focused funds and certain global equity funds may have even higher exposure, sometimes as much 14%.

Investment trusts, like the MNL Capital Management’s Manchester and London Investment Trust, offer another interesting avenue. This trust, trading at a 15% discount to its net asset value (NAV), has nearly a third of its assets in Nvidia, potentially allowing investors to gain exposure to Nvidia at a discount. However, the risks include the possibility of the discount widening, which could lead to losses even if Nvidia’s share price remains stable or increases.

Key Takeaway

Carefully examine your investment portfolio to understand your exposure to Nvidia and the broader AI theme. This awareness will help you make informed decisions on whether to increase or decrease your Nvidia investments based on your risk tolerance and investment goals.

Debt to Income Ratios

Debt to Income (DTI) ratio is an important metric in personal finance, especially when applying for a mortgage. Unlike credit utilisation, which measures the percentage of available credit you are using on flexible credit lines like credit cards, DTI compares your total monthly debt payments to your gross monthly income. This ratio helps lenders assess your ability to manage monthly payments and repay debt, influencing both your ability to secure a mortgage and the interest rates offered by lenders.

To calculate your DTI ratio, add up your monthly debt payments, including any credit card payments, loans and potential mortgage payments. Divide this total by your gross monthly income and multiply by 100 to get a percentage. For example, if your total monthly debt payments are £1,500 and your gross income is £4,000, your DTI ratio is 37.5%.

Lenders categorise borrowers based on their DTI ratios:

• Over 50%: High-risk borrowers, often requiring specialist lenders.
• 30-50%: Acceptable to moderate risk, generally eligible for standard mortgage terms.
• Less than 30%: Good borrowers, likely to be approved by most lenders and receive competitive rates.

Maintaining a low DTI ratio, ideally below 30%, is advisable even if you're not immediately applying for a mortgage. This proactive approach ensures you remain financially healthy and flexible, ready to apply for credit whenever necessary.

Improving Your DTI

To improve your DTI, consider either increasing your income or reducing your debt. Paying down existing debts before applying for a mortgage can also help lower your DTI, enhancing your chances of getting approved for better rates. A mortgage broker will provide personalised advice and recommend lenders best suited to your financial situation.

Later Life Care

Planning for later life care is important, given the rising costs and the likelihood that many will require some form of care. According to recent census figures, about 10% of people aged 85 or over and 20% of those aged 90 or above live in care homes. The average life expectancy for someone entering a care home at age 90 is approximately 2.9 years for women and 2.2 years for men.

Current and Future Costs

The average cost of a care home stay today is around £111,000, excluding additional nursing costs, If you include nursing costs this can bring the total to £136,000. Looking 20 years into the future, these costs are projected to rise significantly due to inflation, reaching £165,000 for basic care and over £200,000 for care with additional nursing.

Funding Later Life Care

Local council funding for care home costs is means-tested. If you have savings exceeding £23,250, you are expected to pay for your care in full. If your savings are below this threshold but above £14,250, the local council contribution will depend on your exact savings. Savings below £14,250 generally qualify you for full council funding.

For those planning ahead, saving for later life care is something to consider. A 65-year-old today would need to save about £500 a month over the next 20 years, assuming a 5% annual investment growth, to accumulate £200,000 for future care costs. Starting earlier, such as at age 45, can significantly reduce the monthly savings needed, making it more manageable.

Insurance Options

Insurance products like Vitality's serious illness cover can provide financial support for later life conditions.

Multiple Choice Questions

Here are five multiple choice question to test your understanding of the topics covered on this episode.

1. What is Nvidia's primary market?
   • a) Renewable energy
   • b) Chip manufacturing for AI
   • c) Automobile manufacturing
   • d) Consumer electronics
2. What percentage of the S&P 500 does Nvidia represent?
   • a) 3%
   • b) 5%
   • c) 7%
   • d) 9%
3. What investment vehicle can offer Nvidia exposure at a discount?
   • a) Mutual funds
   • b) Exchange-traded funds (ETFs)
   • c) Investment trusts
   • d) Savings bonds
4. What does DTI stand for in the context of personal finance?
   • a) Debt to Investment
   • b) Debt to Income
   • c) Debt to Interest
   • d) Debt to Insurance
5. What is the average cost of a care home stay without additional nursing costs?
   • a) £90,000
   • b) £100,000
   • c) £111,000
   • d) £136,000

Answers

• 1. b) Chip manufacturing for AI
• 2. c) 7%
• 3. c) Investment trusts
• 4. b) Debt to Income
• 5. c) £111,000

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