Sophie is 32 and would like to "retire" at 45, hopefully maintaining a "middle-class lifestyle" off her investments. "I'll continue to work," she says, "but at that stage focusing on my own pursuits, whether it be my own business or charity - likely both." But she want to know if her plan is feasible.
She began investing in her US 401k retirement plan six years ago. A year later she started a UK pension and last November she moved her savings from a cash individual savings account (Isa) to an investment Isa.
Altogether, her investments are worth just over £80,000. However, she plans to subscribe the maximum £15,000 to an Isa over the next 12 months, and hopefully maintain this level of investment for the foreseeable future.
She aims for at least a 10 per cent annual return on her investments until "retirement". In order to do this, she is willing to take on more risk. "I want a higher return and am at the most risk-tolerant stage in my life," she explains. "I am new to investment so I'm sticking to exchange traded funds (ETFs). The portfolio is designed to maximise growth by sticking to equities while spreading the market risk over different asset classes and geographies. I am staying away from bonds due to their over-valuation and the predicted interest rate rise.
"I would like feedback on the portfolio, which is not delivering a high return due to its simple, low-maintenance and low-risk nature. I need to know how to to drive higher returns and how to manage underperformers, such as my Vanguard FTSE Developed Europe ETF."
Isa and pension
Retirement at age 45
SOPHIE'S ISA AND PENSION PORTFOLIO
| Name of holding | Value | % |
| iShares UK Property UCITS ETF (IUKP) | £22,188 | 27% |
| Vanguard FTSE Developed Europe UCITS ETF (VEUR) | £14,826 | 18% |
| Vanguard S&P 500 UCITS ETF (VUSA) | £15,990 | 20% |
| Cash | £2,000 | 2% |
| US 401K Pension | £9,592 | 12% |
| UK Friends Provident Pension | £6,988 | 9% |
| UK Scottish Widow Pension | £8,791 | 11% |
| UK Standard Life Pension | £366 | 0% |
| TOTAL | £80,741 | 100% |
Source: Investors Chronicle
Colin Low, a chartered financial planner with Kingsfleet Wealth, says:
Your circumstances present an interesting scenario to plan with. You have a reasonably short time horizon over which to try to accumulate both a significant sum and yet achieve a high level of return.
Your objective of an average annual return in excess of 10 per cent per year over the next 13 years is challenging; especially as you describe yourself as a moderate risk investor. It is worth noting that as you are only in your early 30s you probably have the tolerance to accept a level of risk that someone later in life could not possibly consider.
There is no doubt that you are focused on investing a significant sum on a regular basis with the objective of maximising returns on this and therefore I would encourage you to set up a regular payment so that your savings can be invested on a monthly basis. This is often a very good way of both avoiding concerns regarding market sentiment but also benefiting from a 'trick' known as 'pound cost averaging'.
I will avoid any specific guidance in respect of your US pension fund as I do not feel that we have the appropriate international tax expertise to be able to guide you on this but you would be wise to consider carefully the tax wrapper of all of your other funds and, wherever possible, utilise your annual individual savings account (Isa) and pension allowances.
In respect of your fund selections, I can understand the purpose in investing using passive vehicles, but a weighting that is so high in respect of UK property is unlikely to deliver the long-term returns that you are seeking.
Placing such significant weightings in the Vanguard FTSE Developed Europe UCITS ETF (VEUR) and Vanguard S&P 500 UCITS ETF (VUSA) is also taking a significant risk as there are large parts of the global economy that you are totally overlooking. Big may be beautiful, but it's often said that elephants don't gallop. If these two geographical areas are going to deliver the returns that you require then you are relying on large, advanced economies and companies to drive high levels of equity return over the next few years. If double-digit returns are to be achieved, then a broader investment spread may be of benefit and this may require taking additional risk by looking at emerging markets and smaller companies and holding higher weightings of these higher-risk assets. [Editor: Visit the IC's Top 50 ETFs for suggestions in these areas.]
I note that you are considering purchasing some fixed interest (gilt) and inflation-linked bond ETFs and, again, you should be mindful that this could also provide a further brake on the overall return that your portfolio could deliver in the long run. They would provide a hedge against a poor stock market run to a degree, but rising interest rates could also impact the investment returns that would be available.
One way in which you could look to remove a degree of risk from the portfolio, hold a broader range of assets and keep a low cost of holding would be to utilise funds such as the Vanguard LifeStrategy Funds or similar Multi Asset Passive arrangements from BlackRock and Fidelity. These allow you to determine the level of equity content and therefore a management of risk (as defined by tracking error) is provided by the company.
In respect of your UK pension holdings, you may wish to look at reducing the cost on these by moving into similarly structured passive investment vehicles. Most of the UK pension providers provide these either by outsourcing to another provider or by offering an internal index tracking fund.
Doug Millward, investment manager at Lowes Financial Management, says:
Your plan to retire at 45 is an ambitious one, and you will have to continue with your intention of maximising your Isa investments over the coming years to hope to achieve this, as well as reaching your target growth rate of 10 per cent a year. Having said that, by starting to invest early you are giving yourself the best possible opportunity, and of course it all depends on the level of income you require in retirement.
Looking at your UK pensions first, as a general rule we would favour consolidating them into one plan as this can help reduce costs, give a wider range of investment choices, and it also lends itself to easier maintenance and monitoring. You need to check before you do, however, to make sure that you will not be losing any potential benefits from the existing schemes that you could no longer have in your new arrangement.
In terms of your tax position, if you were to move abroad before your retirement then your existing pension funds could be left as they are, as could your Isas. However, you would no longer be able to add new money to these savings while you remained a non UK resident. You could, of course, continue to manage your existing investments, making any changes you felt appropriate.
Turning to your general investments, as you appreciate, you will have to take more risk to achieve the higher returns you are targeting. We agree with your current position of staying away from bonds if you wish to maximise your returns over the coming years, as we feel these types of investment will offer little in way of return above the income they produce. We believe the better returns will come from equity-linked investments over the coming years, but support your view that spreading your investments over different geographical areas will help spread the market risk.
While using index tracking funds can give an investor exposure to the investment markets in a simple, low-cost way, we would usually recommend the use of actively managed funds. Charges on actively managed funds are higher, but an index tracking fund invests in all the stocks within the index, good or bad, whereas a good fund manager will only choose the companies they feel will be the better performers over the long term, which will hopefully lead to enough outperformance to compensate for the added cost.
A mixture of global and UK equity funds would form a good core to your portfolio, with smaller holdings in specific areas, such as Europe, Asia or emerging markets a round that core hopefully enhancing returns but not affecting the overall returns too much if they don't perform as expected. Also, the use of income generating funds should be considered as part of the portfolio with the income reinvested, as the compounding effect can enhance returns over the long term, while smoothing some of the volatility at times.
But if you wish to take more generic views on an index or region rather than having to research individual funds, one solution would be the use of structured products, which can give a return linked to one or more indices, but also offer a level of downside protection should the indices fall, which may suit your more moderate approach to risk. The indices used and level of protection varies from plan to plan so you would need to compare them carefully, but some of the plans, especially ones linked to more than one index, offer returns in keeping with your long-term objectives. If you do invest in structured products, then it is also important to make sure the counterparty (the institution underwriting the investment) is a sound company, because as with purchasing shares in a single company, their failure could lead to a total loss of capital. Of course, diversifying your investments over a number of plans with different counterparties will help mitigate this risk.
