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Taking charge of my investments at 21

We give some tips to a student who is taking over two portfolios that her father has been managing on her behalf since she was born

Emma has just turned 21 and has a self-invested personal pension (Sipp) and an individual savings account (Isa). She recently raised an eyebrow when she asked the University Library to stock Investors Chronicle.

"I have been investing for just under a year, but my dad has been investing for me since I was born," she says. "I am excited about taking over total ownership of my investment portfolio.

"The Sipp and Isa that my dad has been managing for me include inheritances and his own regular contributions. My Dad targeted both portfolios towards growth, predominately in high-tech as he works in that sector. He set up my Isa to be a deposit on my first house in five or seven years' time, whereas my Sipp was set up so I can get a head start in pension provision. However, I wish to change the portfolios as I have different objectives for them.

"I am in my second year of University studies and plan to go and live abroad in the next two years as I am mad keen on snowboarding and have qualified as an instructor.

"I am living on a student grant (debt) and need income. I therefore want to change my Isa fund into an income-generating machine, whereas for my Sipp I am prepared for the long game and more risk.

"My dad has promised to put a minimum of £5,000 a year into my portfolio for the next five years. At present he puts the maximum amount, £2,880, into the pension and the rest into my Isa.

"I want my dad's promised £5,000 a year to be 100 per cent allocated to my Isa only. If I buy in the UK I am interested in the Help-to-Buy Isa as I would be a first-time buyer. However, I am a strong believer in investing rather than saving, so don't think this is for me."

Help-to-Buy Isas are based on a cash savings account and the scheme does not yet apply to stocks-and-shares Isas.

Emma's portfolio is held with Hargreaves Lansdown, which she thinks may be too expensive.

"I want to change both portfolios so as to have more collective investments as I cannot be monitoring my investments more than once a month. Also in summer holidays I travel and cannot really monitor them.

"My dad is a momentum investor, which I think is missing the big high-risk trades that I am happy to utilise in my Sipp. Also, his stock picks for the Isa have been too high risk which is reflected in the very poor return."

Emma recently sold an investment that her dad made in GW Pharmaceuticals (GWP). "It was his idea of a joke as he thought students would be interested in cannabis-based bio."

Instead she has invested in JD Sports (JD.) and Amazon (US:AMZN). "I am a customer of both and they have performed very well."

Reader Portfolio
Emma 21



Emma's portfolio

Name of holdingValue
Character Group (CCT)£8,685
Amazon (US:AMZN)£4,586
China Life Insurance (US:LFC) £3,475
iShares FTSE 250 UCITS ETF (MIDD)£4,209
Service Now (US:NOW) £2,453
Victoria (VCP) £4,875
Woodford Patient Capital Trust (WPCT)£132
JD Sports (JD.)£145
Total  value£28,564
Amazon (US:AMZN)£6,254
Character Group (CCT)£7,620
China Life Insurance (US:LFC) £12,318
Guidewire (US:GWRE)£13,613
LinkedIn (US:LNKD)£13,660
Woodford Patient Capital Trust (WPCT)£5,150
Total value£58,617

Source: Investors Chronicle



Chris Dillow, the Investors Chronicle's economist, says

Congratulations. Thanks to your dad, you've got the big thing right. The best thing savers can do is to start early, because this puts the strongest force in investing on your side - the power of compounding. To give you a mathematical example, someone who saves £1,000 a year for 30 years with a return of 5 per cent (a reasonable assumption for real equity returns) would see their money grow to over £66,000. But someone who saves for only 25 years would end up with less than £48,000. Those extra five years mean, in effect, that you are converting an extra £5,000 investment into more than £18,000.


Colin Low, a chartered financial planner with Kingsfleet Wealth, says:

Many congratulations on your 21st birthday and gaining the opportunity to manage the investments so expertly selected by your father. I hope that you can blaze a trail for the rest of your generation.

You have three very different objectives for your arrangements - one longer-term objective of providing an income in retirement (probably 40-50 years from now), through your Sipp, to build funds for a deposit on a house purchase in the next five-seven years and to generate immediate income.

You are quite right to be prepared to take more risk with your Sipp as this will have plenty of time to recover if the underlying assets go through turbulent times. Note that HMRC limit tax relief on pension contributions only to tax years in which you are UK resident (and for the five years following).

Student loans are an aspect you will need to watch. If the loan is from a high-street bank then just pay it off as the rate will be prohibitively expensive, but if you're referring to the Student Loan Company then your repayment will be deferred until your earnings are sufficiently high. However, as a means of supplementing your other income and amending the portfolio to provide a yield, then that would make some sense. Managed funds offering good potential growth and a consistent yield of 3-3.5 per cent should be readily obtainable.

A final consideration is in relation to your father's contributions on your behalf. Other than out of regular income, up to £3,000 per donor may be given away (to all recipients in aggregate) in each tax year exempt from inheritance tax. In excess of this, it is possible that gifts could be added back into the donor's estate if they should die within seven years. So just ask your father to keep good records of these payments - hopefully they won't be needed, but it's important to be aware of this as it's a matter that would fall on you.



Chris Dillow says:

The Help-to-Buy Isa might be a political and economic abomination, but it is a form of free money: the government's top-up means it will offer higher returns than equity Isas probably will. I would go for it in your shoes.


Colin Low says:

I would suggest that for a shorter term, you would be wise to use the Help-to-Buy Isa for your new investments. However, if and when you move overseas you will be unable to contribute to an Isa, so it could make this aspect very tricky as it relies on regular saving; meaning you would need to transfer the funds to a cash Isa.


Katie Tasker says:

Your current Isa value is £28,000 and adding £5,000 per year for five years (withdrawing income) would produce a nominal pot of £53,000 (it will be more or less according to performance). The Help-to-Buy Isa will add 25 per cent to savings (maximum of £3,000) and seems sensible.



Chris Dillow says:

There is a common fallacy here, which I fear your dad has committed. It's that if we are long-term investors we must buy long-term growth stocks.

This is not true. Long-term growth is incredibly hard to spot, perhaps because a lot of it is random: some companies just get lucky. This means there's a danger that overconfidence about our abilities to spot growth will cause us to pay too much for stocks that seem to offer it. History tells us that 'growth' stocks, on average and in the long run, actually underperform defensives and value stocks.

Something else should warn long-term investors against 'growth' stocks. It's that, as Joseph Schumpeter said, economic growth is a process of creative destruction. Technical progress creates new companies and destroys old ones. What looks like a glamorous investment now might well therefore be a long-forgotten relic by the time you reach middle-age. Just look at a list of the members of the FTSE 100 30 years ago. How many can you recognise? This should warn you that, by the time you get to 50, many of today's big stocks might be long gone.

There's a simple solution here. Long-term investors like you should hold tracker funds. These protect you from the twin dangers of paying too much for growth that doesn't actually materialise and of creative destruction. They also save you from having to rebalance your shareholdings. You say you can't monitor your investments often. This is a wholly good thing: if you look at your portfolio every day you'll get tons of noise but little signal. But it implies that you should have a portfolio you can forget for long periods. A tracker fund permits this.

Ideally, you should go for a global tracker. This would partly protect you from the small but nasty risk that the UK and western Europe suffer Japan-style 'lost decades' of low growth, in which poor returns on shares would exacerbate a worsening in your job prospects.

My cautions about growth investing also apply to investing for income. You say you want your Isa to generate income. But it doesn't follow that you should buy income stocks. Granted, these deliver decent returns on average over the long run. But these often come at a price - of higher risk. This is especially the case for the next one or two years. If interest rates rise, investors who have bought high-yielding stocks for their income might dump them in favour of cash. You should instead focus on total return: if stocks rise you can create your own income simply by selling some of your portfolio. History tells us that it is momentum, value, defensives and quality (defined by objective measures such as profitability) that offer the best long-term total returns. If you don't want to pick these, go for a tracker fund.


Katie Tasker, investment adviser at Charles Stanley, says:

Although it may seem you are trying to achieve too much, dual objectives are absolutely fine. You clearly prefer 'collectives' for your Isa, but a similar approach would be sensible with a Sipp as well. The days of 'buy and hold' shares for many years have gone and you will need someone to keep a sharp eye on things, which may be a problem if you are uncontactable during an important event, for example. You may also have limited funds with which to diversify and reduce stock-specific risk. All of this clearly makes collective funds attractive.

Collectives can offer diversification by asset class and geography. There are active funds with income mandates in growth regions where required and one such is the Matthews Asia Dividend (LU0594556648). Unusually, it includes Japan (strong in 2015), yields 3 per cent and accesses a growing region. Newton Global Income *(GB00B7S9KM94) invests in world-leading multinationals and pays 4 per cent.

A medium-low strategy may require bond exposure, despite the fact that many investors hold that bonds offer little value with rates at record lows. They too can correct violently. You might use short-dated bond collectives to better ensure capital preservation for the house deposit, as volatility reduces as a bond nears redemption. However, should you favour an equity-only approach, you may need to accept a medium-high categorisation as more appropriate.

Turning to pensions, buying companies you are familiar with can be successful. However, it is important to remove emotion from investment: never fall in love with a holding. Buying Amazon because you like the service is fine: it likely means that others do too. However, you can access tech via collectives which eliminates stock-specific risk. Study the 2000 crash to see what can happen to even the most favoured stocks.

The Sipp has a time horizon of 40-plus years giving time to recover losses resulting from a higher-risk strategy, these can be limited via a 'stop-loss' policy.

In summary, a collectives-based approach is best considering the current uncertainties. These types of investments do not preclude a loss, but offer smoother performance with the right balance. Many investment trusts trade at discounts, offering a head start. You can also select from lists on execution-only platforms, which will limit your costs.

*IC Top 100 Fund

**None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances. If you would like your portfolio to be considered for Portfolio Clinic, email: