Kwasi has been investing for three months into a stocks and shares individual savings account (Isa). Although his portfolio is worth a modest £8,000, he has set himself a big target. He says: "I turned 30 this year and in 10 years' time I'd like to be able to quit my current job, obtaining my income mainly from investments. I will then supplement this income with consultancy work."
He wants investment income of between £15,000 and £25,000 a year at age 40. To achieve this, he plans to invest between £1,000 and £2,000 a month, typically phasing his entry into positions in order to average out the cost incurred. He is also considering a buy-to-let investment in addition to his £500,000 home and moving his defined-contribution workplace pension to a self-invested personal pension (Sipp) where he can manage the money himself.
He says: "My experience initially began with the short selling of Northern Rock shares in 2008. I learned from this experience that speculative trading is far too stressful. I took a break and spent a considerable amount of time educating myself on investing. I have naturally gravitated towards the teachings of Ben Graham. I had to liquidate my assets in order to pay for my wedding in 2012 and the Royal Mail initial public offering (IPO) was the trigger for me getting back into the market.
"I have a high tolerance to risk. The only way I can save is via stocks and shares. I have never saved money in a savings account in my life."
Stocks and shares Isa
Income of £15,000 at age 40
KWASI'S ISA PORTFOLIO
|Name of share or fund||Number of shares/units held||Price||Value||% of portfolio|
|Royal Mail (RMG)||227||526.43p||£1,194||15|
|Merlin Entertainments (MERL)||317||357.2p||£1,132||14|
|Royal Dutch Shell (RDSB)||19||2547p||£475||6|
|British Sky Broadcasting Group (BSY)||114||874p||£996||12|
|BT Group (BT.A)||100||366.1p||£366||4|
|Standard Life (SL.)||103||380.5p||£391||5|
|JP Morgan Chase and Co (JPM:NYQ)||60||56.1 USD||£1,985||24|
|National Grid (NG.)||32||843.5p||£269||3|
|St James's Place (STJ)||80||773p||£618||8|
LAST THREE TRADES:
SSE (buy), British Sky Broadcasting (buy) and St James's Place (buy).
Dialight, Berkely Group, Taylor Wimpey, iGas, Bank of America, Wells Fargo, Macy's JC Penny, Target Healthcare Reit and ETFS Cocoa.
Chris Dillow, the Investors Chronicle's economist says:
I sympathise with your desire to quit your job by the age of 40; I have learned the hard way that work doesn’t get more pleasant as you get older. However, I doubt if you can achieve your aim.
Let’s assume that equities' real total return over the next 10 years averages the same as it has since 1900 - 5.3 per cent per year. You can think of this as two percentage points of real growth and 3.3 percentage point of yield. Then if you save £2,000 a month, your wealth (including your existing equity portfolio) should grow to around £325,000. If interest rates in 10 years’ time are where the market expects them to be, at 4 per cent, this sum in cash will give you an income of around £13,000 in today’s money.
This is a little short of your hopes. And this assumes a lot. It assumes average investment luck, and that you’ll be able to save as much as £2,000 a month - but if you have children, you might find this tricky.
Put it this way. I know of a few people who managed to retire or semi-retire in their 40s. But they did so because they were very well paid, not because they earned fantastic returns on their savings. There’s a lesson in this.
I’d advise you to put thoughts of very early retirement onto the back-burner. Your biggest asset isn't your financial wealth but your human capital. Focus upon this. Find a job you enjoy and are good at. That way, working into your 40s won’t be so onerous, and you should build yourself a bigger reputation which you can use to acquire consultancy and freelance work. Financial rewards and freedom are often obtained through what economist John Kay calls oblique strategies; they come to us while we’re aiming at other things.
As for your equity portfolio, I have no big problem with it. I like the exposure to defensive-type stocks - Royal Dutch Shell, Glaxo and BT are pretty defensive - as there are good reasons to suspect this equity class will continue to beat the market. However, I’d remind you that there is some political risk in utilities - though also upside if this risk doesn’t materialise - and that there’s a danger of over-diversifying and ending up with a closet tracker if you buy everything on your current watchlist.
You ask about increasing exposure to property. I’m not sure. You already have a huge position in property, and adding to it further entails taking on risk. Not only is there interest rate risk plus the risk of voids (one or two months without a tenant makes the difference between profit and loss for many landlords) but there’s also valuation risk; I find it easier to believe that property is overvalued than that equities are.
Should you want to take on more property exposure, though, there are low-cost ways of doing so. For example, there’s a residential property unit trust run by TM Heathstone. And Castle Trust’s Housa fund is intended to track house prices.
You also ask whether you should move your work pension into a Sipp and manage it yourself. Without knowing precisely how the work pension is managed, and at what cost, I can't answer this exactly. My instinct would be to stick with the company scheme for now, on the grounds that doing so diversifies investment manager risk. The company scheme, in effect, hedges you against the risk that - despite your best efforts - you might turn out to be a poor stock-picker.
Ben Yearsley head of investment research at Charles Stanley Direct says:
Good luck to you - if you can achieve your goals in the next decade you will have done very well. However, without wishing to rain on your parade, are your goals achievable? To achieve your desired income you will need an investment pot of approximately £500,000. To put this into context, £1,000 a month invested at 6 per cent per year will give a pot in 10 years of £163,000. Well short I’m afraid, even £2,000 a month at 6 per cent will only give £325,000, so either you have to invest more, achieve higher returns to achieve your goals, or move the timescale out a bit.
First of all the simple things, use your Isa allowance. The allowance is increasing from July this year to £15,000, which you should be using in full if you want to get to your goal and make your affairs as tax efficient as possible. You need to choose your Isa provider carefully to ensure that the costs of frequent trading don’t outweigh the benefits and start massively eating into your potential profits.
Buy-to-let has been a good investment for many over the years, however I am not convinced, especially with interest rate rises looming in the next few years. You need to gear up, ie borrow heavily to make a decent return on buy-to-let, and hope that house prices keep rising. In addition, you probably have to manage the properties yourself, otherwise paying agents fees of 10 per cent massively eats into your profit margin. Leveraging is a good and efficient use of capital, when the asset in question rises, but don’t forget that if the property is empty for a while the mortgage still needs paying, and if house prices fall you end up in negative equity. There are a few funds you can buy that invest in housing, however I don’t think I would own them.
If you are that keen on investing, I can’t see why you would want to leave your pension in a defined contribution scheme with a limited choice of investments. You should definitely consider moving this to a Sipp, and maybe asking your employer if they can pay their contributions to the Sipp instead. However, if they won't, you should ensure you get their payments though into the existing scheme, but still transfer the existing pot to a Sipp.
Turning to your share portfolio, I would divide the companies you hold into two categories.
• British Sky Broadcasting (BSY) - competitive threat from BT Sport overdone; good cash flow manifesting itself in growing dividend.
• BT (BT.A) - sport gets the headlines, but the big story is a return to profit growth on the back of ongoing cost-cutting success.
• Royal Dutch Shell (RDSB) - new CEO Ben van Beurden applying much more sceptical eye to capital expenditure proposals, which have often yielded sub-optimal results in recent times. This should benefit shareholder returns.
• National Grid (NG.) - the utility sector’s best-kept secret: generous RPI-linked dividend and a low public profile which shields it from public controversy over energy prices.
2. Consider selling:
• Royal Mail (RMG) - big run-up since IPO - good business with plenty of potential, but that may now be in the price. He’s had the best of it - bank profits.
• JP Morgan Chase (JPM:NYQ) - banking is a very volatile and cyclical sector so it's not wise to have so much of the portfolio in a single one.
On your watchlist, I would avoid Berkeley (BKG) and Taylor Wimpey (TW.) - they’ve had a fantastic run and now fully reflect the industry’s return to health.
My final thoughts are that your either need more stocks in your portfolio or need to diversify by buying either funds, trackers or exchange traded funds (ETFs). You only have 12 shares at present - the bare minimum for getting the benefit of diversification. At least 20 would be better in my view. Currently I favour 'late-stage cyclicals' such as engineers, which are expected to benefit from increasing corporate capital expenditure as Britain’s economic recovery starts to mature, for example GKN (GKN), Rolls-Royce (RR.), Babcock (BAB).