39-year-old asks "Where should I invest £70k?"

INDRO'S PORTFOLIO

Chris Dillow, the Investors Chronicle's economist, says:

As you might imagine, I applaud your interest in tracker funds and your concern to minimise fees; these compound a lot over time, so matter enormously for longer-term investors.

What’s interesting and unusual about your position is that your planned savings are big relative to the current size of the portfolio. This goes some way to justifying your low weighting in cash. I say so because it means you can use a form of time diversification. If share prices fall, you’ll be able to buy more of them with your £70,000 next year. In this sense, your ability to buy cheaply and so enjoy good returns on the £70,000 protects you against falling prices this year - and so on, for as long as inflows are high relative to the size of your wealth.

There are, however, three risks here. One is that a change in personal circumstances (such as job loss) might mean you can’t save. It’s in this context that there is a perhaps a case for cash; it protects you against risks to your human capital which, if they materialise, would mean you can’t time-diversify your equity holdings. Of course, only you can decide whether or to what extent this is a relevant consideration.

Secondly, there’s the danger that you’ll wimp out. If global equity prices fall you might not be bold enough to buy when others are selling. This is especially dangerous because bad returns are always accompanied by something else unpleasant - a lot of pessimistic and plausible chatter. You can protect yourself against this risk by investing in the core of your portfolio - UK or global index trackers - by direct debit. This helps commit you to saving.

Thirdly, there’s a risk that this strategy might not work. It does so wonderfully well if the market trends upwards over time. In such a case "buying on dips" - which is what regular cash investments do - will be profitable. However, if we suffer what Japan did in the 90s - a 'lost decade' in which the economy consistently disappoints expectations and so share prices continue to languish - buying after falls won’t work, because falls will lead to more falls.

This is a low-probability event - though economists are increasingly talking of the danger of the euro zone suffering it and this could infect the UK - but a high-cost one. There are two ways you could protect yourself against it, though both have drawbacks.

One is to reconsider your antipathy to bonds. I agree that the central case is that government and top-quality corporate bonds will do badly as rates rise. But if we do suffer long-term stagnation, bonds - especially government bonds - would do well.

The second is to consider emerging market equities. I’m not convinced that you should pay much heed to valuations here; apparently cheap markets can be cheap for a reason (such as a downward revision to growth expectations) and can get cheaper. Instead, one case for emerging markets is that they are less likely in aggregate to suffer from the long-term stagnation that might afflict Europe, and so offer diversification against that particular risk. Personally, I prefer general funds as they diversify country-specific risk better, and I’d consider frontier funds which tend to be less correlated with world markets. Bear in mind, though, that these advantages come at a cost, of a greater chance of especially sharp falls.

As for the choice between FTSE 100 and mid-cap trackers, I wouldn’t get hung up either way here. In the short-run, the factors that cause one to outperform the other are largely unpredictable. In the long-run, I’d back Gibrat’s law, which says that growth is independent of size, which implies that long-run returns should be pretty similar across equity sizes. In this sense, you’re right to have a FTSE 250 tracker alongside the FTSE 100 fund.

Lee Robertson, the chief executive officer of wealth management company Investment Quorum, says:

Firstly, looking at your property portfolio, the probability is that the value will rise steadily over the next 15 years. Indeed, it is predicted that property prices will increase by around 20 to 25 per cent over the next five years. While you do have mortgages against these properties, you also have rental income on one of them to offset some of the mortgage cost. Admittedly, mortgage rates will rise over time and therefore this might need to be addressed in the future.

Second, your annual savings strategy is commendable and given the time period a well-balanced and risk adjusted portfolio should give you both growth and income over a 16-year time horizon. Also you have said that your attitude toward risk would accommodate a 10-15 per cent loss over a five-year period.

Now turning to your current portfolio, and investing the capital available each year, inevitably we would suggest some changes. While we do at times invest through UK exchange traded funds, and trackers, there is a need to have some exposure to active managers, and with the opportunity to invest in 'clean share classes' many now offer an attractive option against passive investments.

Clearly, having exposure to the overall market through passives is cheap, but do you want to own the market over a long durational period? If you take funds such as Schroder UK Opportunities (GB0031092728), CF Lindsell Train UK Equity (GB00B18B9X76), and Franklin UK Managers' Focus (GB00B4N2QK20) they have all delivered superb one, three and five-year performances, outperforming both the HSBC tracker funds that you hold. It may come down to personal preference over cost certainty as opposed to the uncertainty which can come with seeking alpha from active funds.

In terms of UK commercial property this is an excellent diversifier and we would suggest holding in the Kames Property Income PAIF Fund (GB00BK6MJB36), or the Ignis UK Property PAIF Fund (GB00BJFL1522), as both pay dividends gross making them particularly attractive in Isas.

Clearly the portfolio does have some excellent funds; however, it might be prudent to consider widening the asset allocation to accommodate regions such as continental Europe and the United States. With this in mind, we would suggest BlackRock Continental European Income (GB00B3ZW3465) and the iShares S&P 500 UCITS ETF (IACC), or the SPDR S&P US Dividend Aristocrats ETF (UDVD) which gives investors a growth and income strategy.

Other global options for consideration are Fundsmith Equity (GB00B4LPDJ14), Artemis Global Income (GB00B5V2MP86), and M&G Global Dividend (GB00B46J9127) all of which have excellent fund managers, investment processes and impressive performance track records.

Finally, with respect to further portfolio diversification, and the question surrounding corporate bonds, certainly, there might be a better entry point. Equally, if you are concerned about interest rate hikes, and the backing up of bond yields, then Neuberger Berman Global Floating Rate Income (NBLS), Old Mutual Monthly Income Bond (GB00B1XG8W96) or M&G Optimal Income (GB00B1H05155) have strategies that could capitalise from a higher interest rate environment.

Lastly but not least, it might just be worth considering an investment to counteract any threat from a future rise in inflation, while index-linked bonds could be considered, the M&G UK Inflation linked Corporate Bond (GB00B44VX079) is an attractive option.