Look to the long term rather than trying to time the market

“We are targeting a combined pension pot of £600,000 by the time I am 60 and my wife is 55,” says Amit. “I expect to draw out about £2,500 a month from our pensions. I want a pot of £600,000 because with this value we could safely draw down the required sums without any tax liability for about 35 years. By the time I retire there may be changes to pension tax relief and company contributions, so I propose to make all my contributions within the next six years.

“I am also not planning to withdraw a lump sum, and don’t intend that my wife or I each have a pension pot of over £300,000 in case there are changes affecting these. I add £800 to my self-invested personal pension (Sipp) every month, putting 60 per cent of this into Vanguard Lifestrategy 40% Equity Fund (GB00B3ZHN960) and 40 per cent in Fundsmith Equity (GB00B41YBW71). My wife also puts £800 into her Sipp each month and splits it equally between her four funds.

“Although £2,500 a month should cover our needs, I plan to use my individual savings account (Isa) both to supplement retirement income and fund future expenses such as a deposit for a bigger house in three to five years, and education fees for my children in 12 to 15 years. About 75 per cent of the combined Isas will be used for a house deposit, with 15 per cent set aside for education fees and 10 per cent to supplement our retirement income. I therefore have a more aggressive strategy in my wife’s Isa to cater for the longer-term objectives, and am defensive in mine to meet short-term objectives.

“I am very open to high volatility in my wife’s Sipp, but a little less with mine because of its larger size. I want much lower volatility in our Isas, although we are happy to put off our house buying plans for three to five years if the Isa investments perform poorly.

“I am considering the Lifetime Isa (Lisa), although this will depend on the withdrawal conditions, and whether the government introduces restrictions or reduces incentives around making company contributions into pensions. If the government reduces incentives such as corporation tax relief on pensions, I will stop contributing to these and instead make Lisa contributions. I would then draw down from the Lisas when I turn 65 and my wife turns 60, and allow the pensions to grow until I am 70 and my wife is 65. I reckon with a 5 to 6 per cent growth rate, I should still have a sizeable retirement pot by then that would last for our lifetimes with my desired drawdown amount.

“Other than our portfolio, I have fixed deposits in India worth about £88,000, which earn interest of on average 8.5 per cent. I have started regularly investing the interest earned from these into an Indian mutual fund and equities, which are now worth around £5,500. And I have invested about £150,000 in properties in India, which I hold jointly with my parents. I may be required to return to India at some stage of my life.

“I also have cash worth about £18,000 in our Santander 123 account and £55,000 in my business account, which earns little to no interest.

“I buy on dips and buy investment trusts on discounts to net asset value (NAV). When I make returns of 10 to 12 per cent over short periods I switch out – sometimes completely. But this is something I am trying not to do as I quite often miss out on long-term rallies: I am almost never in equities when markets peak. I have invested close to lows and am too cautious when markets start rising.

“When choosing funds I start with a top-down view. Different asset classes will do better at different times, but deliver the same kind of average returns over 10 years. So I expect a multi-asset fund with built-in rebalancing to position itself better to take advantage of these trends – a reason why I hold Vanguard Lifestrategy 40% Equity.

“I try to have an allocation to bonds of about 20 to 25 per cent across our Sipps.”

Amit and his wife's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

It is difficult to plan for a pension due to uncertainty about future rules, so the solution is to diversify your investments across vehicles. A Lisa is attractive because you get free money from the government, but contributions are capped and there’s uncertainty about future conditions on withdrawals. Pensions are great because of their tax relief, but there is uncertainty about the future rules on these.

Isas, by contrast, are more flexible – you can run them down at any time. I would use a pension, Lisa and Isa if I were under 40 and contribute as much as possible as soon as I could: the power of compounding returns is very great.

You’re also right to buy investment trusts on discounts to NAV. A wide discount on a trust relative to its own history can be a buying opportunity as it can be a sign that investor sentiment is unusually depressed and will bounce back.

Here, though, be aware of your limitations. Nobody can reliably time the market. We will sometimes miss out on some rallies and suffer some falls. A guide you might want to use, though, is the 10-month or 200-day moving average rule. In recent years, it’s been profitable to buy when prices rise above this average and to sell when they fall below it: this has been true for various assets and equity sectors. Such a rule means you’ll miss out on the first phases of market bouncebacks and suffer the first stages of any fall. But it will save you exposure to protracted bear markets, while allowing you to share in long-term rallies.

Gregg Crawford, senior financial planner at Informed Financial Planning, says:

It’s good to see that thought has been put into your future needs with both a desired fund value and planned retirement age, and this has been considered with your expected spending at that time. This is the most important factor when saving for a future need.

You have logically assumed that changes will be made to pensions or tax. It is likely there will be some changes to pension legislation during this period, which will impact on the tax relief available.

Saving over the short term using investments carries risk due to volatility, compared with the use of cash deposits. Understandably, you are looking for greater returns due to the very low interest rates on offer. It is good to see that you understand the risk of this decision and have wisely chosen a lower-risk structure that is better suited to these shorter-term goals.

A current account paying some interest on your credit balances is a good decision as it provides a usable emergency fund. Try to ensure that this is sufficient to meet three months’ worth of your overall expenditure, as a general rule, to give you some breathing space if there is a change in your circumstances.

Angela Murfitt, chartered financial planner, Fairstone

You have a mortgage of £106,000 and a lot can be achieved in a very low-risk way by directing some of your current saving towards reducing your mortgage.

You service your mortgage from your net income and therefore achieve an overall respectable net return on your overpayments, reflecting the interest rate you are paying grossed up by your marginal tax rate. This is because you have to earn the money and pay tax on it before servicing the mortgage.

Doing this will achieve: a guaranteed safe net return much higher than cash with no risk; help in building up the equity in your current property, reducing the need to use your Isas for a deposit; and no risk of delaying your house purchase due to poor investment performance.

You think your pension funds will last around 35 years at your given drawdown rate, however this appears to assume you will achieve high levels of positive consistent growth during the drawdown period. Sequential return risk in drawdown can seriously reduce the length of time funds last, so I would suggest that a lower level of investment risk in drawdown is necessary to reduce the chance of this occurring. This may mean that you need more funds in your pot than you have anticipated if you are to achieve the same income.

To achieve your planned retirement income of £2,500 per month I would suggest that you commit higher sums, if possible, as early in your plans as you can accommodate. This would reduce the need to achieve significantly higher levels of growth on the funds to hit your target value at your chosen retirement age. This would also allow you to capitalise on the tax relief that is available now, which might otherwise be removed in the future.

You could also draw down from the Isas first and preserve your pensions, which benefit from inheritance tax-friendly features.

Time in the market rather than timing the market makes for the best long-term investment performance results. I would encourage you to commit to your plan of using multi-asset and multi-manager funds for the core portfolios, with some satellite funds around the periphery. And avoid meddling with the investments in between review periods: if your investment strategy is sound the temptation to trade short-term market plays can have devastating results because you will nearly always miss upside delivered by the best days in the market.

HOW TO IMPROVE YOUR PORTFOLIO

Chris Dillow says:

If you can cut the amount of cash in your business account without incurring a nasty tax liability, do so.

Your exposure to Indian cash and equities makes sense if you return to India as you’ll have rupee liabilities. This, though, comes at a risk.

You want to move to a bigger house, but if house prices rise you may lose out as in such a scenario sterling might also rise, meaning your Indian assets are worth less. I’m not saying you should sell them, but just be aware that they might not protect you from the danger of rising house prices.

Your portfolio has some concentration risks. Emerging markets and mining stocks tend to rise and fall together: think of them as global cyclicals. This means that your gold funds, which invest in mining shares rather than the metal, Fidelity China Special Situations (FCSS) and Stewart Investors Asia Pacific Leaders (GB0033874768) are, in effect, a bet on the same thing - good growth in China. That's risky.

You’re spreading this risk via the large exposure to bonds in Vanguard Lifestrategy 40% Equity Fund, but there might be other ways of doing this.

One would be a global tracker fund. Another would be to have some exposure to UK defensive equities, which many equity income funds and investment trusts invest in. These have the virtue of doing well over the long run while reducing market risk. They therefore help overcome the problem that there can be a trade-off between risk and return.

Gregg Crawford says:

A multi-asset fund, such as you include in your portfolio, has the benefits of built-in rebalancing and active management. I am assuming, however, that you are relying on your own judgment to select your desired asset allocation within the portfolio. Try to stick to an investment model that is linked to your attitude to risk, and keep tracking this as the economy changes to ensure that the weightings are adjusted, as this will help with the growth of your portfolio at all stages of the market.

Risk-rated asset allocation models are readily available from large investment monitoring and research companies such as Morningstar or FE Analytics. You may also wish to consider multi-asset funds for the whole portfolio to ensure that all segments are being managed at all times.