- These investors want to start a family and buy a home in the next 12 months, and to have an income of £35,000 a year when they retire in 2045
- Their investment Isa is 60 per cent in equities and 40 per cent in bonds, but this might be too cautious for a long-term investment horizon
Workplace pensions; Isa invested in funds, gold and silver; trading account invested in direct equity holdings, cryptocurrencies, cash.
Start a family and buy a house next year, income of £35,000 a year from 2045, total return of 6-7% a year, invest cash
Jeremy and his wife are 35 and 32, respectively, and earn about £100,000 a year between them. “We plan to start a family and buy a house in the next 12 months,” says Jeremy. “We would also like to have enough assets to give us an income of £35,000 a year from age 60 in 2045. We have set aside funds for a house deposit worth about £45,000.
“We pay 5.45 per cent of our salaries into defined-benefit (DB) pensions. Based on the retirement modeller, if we stay in our current jobs on the same salaries at age 65 we would each be eligible for approximately £30,000 a year, indexed to inflation. This is based on what we have already put in plus around 30 further years of contributions.
"We started to build an investment portfolio last year and would like it to make a total return of 6 to 7 per cent a year. We take a longer-term view with our investments so are comfortable with a higher level of risk. We are reallocating our portfolio from cash to investments such as equities, gold, silver and cryptocurrencies. We could tolerate the value of our investments falling by up to 40 per cent in any given year as equities have volatile swings.
"We are not experts and don’t want to spend huge amounts of time managing our investments, so our core holdings are passive funds. We invest £2,500 every month into a 60/40 equities/bonds portfolio held within an individual savings account (Isa). This is the best way to automatically rebalance, pound cost average, achieve tax efficiency and broad diversification, and minimise fees.
"For example, we have recently invested £342.50 in Vanguard Global Bond Index (IE00B50W2R13), £510 in Vanguard U.K. Investment Grade Bond Index (IE00B1S74Q32), £215 in Vanguard U.K. Short-Term Investment Grade Bond Index (IE00B9M1BB17), £716.25 in Vanguard Emerging Markets Stock Index (IE00B50MZ724) and £716.25 in Vanguard FTSE All-World UCITS ETF (VWRL).
"We hold a range of funds rather than just Vanguard LifeStrategy 60% Equity (GB00B3TYHH97) as we think that fund would overexpose our portfolio to UK stocks. We want more long-term exposure to emerging and global economies.
"But we are concerned about overinflated asset prices so have diversified into gold and silver, and bought some cryptocurrencies – Bitcoin, Etherum and Ripple.
Because investing can be fun, we also invest £50 to £100 in one or two direct shareholdings every month using a trading app. These securities account for less than 5 per cent of our investments, but we take a lot more interest in them than all our other holdings."
|Jeremy and his wife's total portfolio|
|Holding||Value (£)||% of the portfolio|
|Vanguard Emerging Markets Stock Index (IE00B50MZ724)||5,700||6.00|
|Vanguard FTSE All-World UCITS ETF (VWRL)||5,500||5.79|
|Vanguard U.K. Investment Grade Bond Index (IE00B1S74Q32)||4,000||4.21|
|Vanguard Global Bond Index (IE00B50W2R13)||2,700||2.84|
|Vanguard U.K. Short-Term Investment GradeBond Index (IE00B9M1BB17)||1,700||1.79|
|iShares Physical Gold ETC (SGLN)||1,600||1.68|
|WisdomTree Physical Silver (PHSP)||1,600||1.68|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
Chris Dillow, Investors Chronicle's economist, says:
You are comfortable taking on a higher level of risk. That’s reasonable, although not because you are young. Rather your DB pensions mean that you are investing in a safe asset which gives you a cushion against losses elsewhere. But your investments do not reflect this taste for risk they are heavy in cash, bonds and precious metals.
There is a case for being cautious in the near term. Equity valuations aren’t great – even in the UK. The dividend yield on the FTSE All-Share index is below its long-term average. The global ratio of share prices to the money stock is high, which has in the past been a lead indicator of falling prices. And it’s not clear that the world economy will recover as strongly or as quickly as some cyclical stocks seem to be hoping. So in the near term your portfolio might be well positioned.
However, I fear that having a 60/40 per cent equity/bond allocation over the longer term might be too cautious. Bonds protect us against some types of equity bear markets, such as those caused by fears of recession or increased risk aversion. But you pay a high price for this insurance, as expected returns on bonds are low, and negative in real terms. Worse still, if or when the world economy bounces strongly there could be big losses on bonds – especially if investors begin to anticipate rising interest rates.
And not just losses on bonds, but also on precious metals as these tend to move with bonds because they don’t pay interest. This isn’t a big problem when interest rates are low, but becomes more of a problem when rates rise. This means that precious metal prices are likely to fall when rates look like they are going to rise. So a cautious portfolio could cost you money if we see better times.
Luckily, there’s another way of managing equity risk, which is quite simple if you use tracker funds. This involves staying in shares when their prices are above their 10-month or 200-day average, and selling them when they fall below this. Doing this protects you from the long or deep bear markets that really hurt, such as those of 2000-03 or 2008-09.
You should follow this strategy with another asset – cryptocurrencies – although I’m sceptical of these. I suspect interest in them owes more to the viral power of narratives than any economic fundamentals, so they might be a speculative bubble.
But the 10-month rule is a way to play bubbles. It keeps you in bubbly assets while they’re rising and, although it doesn’t get you out at the top, it means that you sell them before much of the deflation occurs. If you apply this strategy, it doesn’t matter if my scepticism is wrong: you’ll just ride the upside while avoiding some, though not all, of the downside.
James Norrington, specialist writer at Investors' Chronicle, says:
You have a lot of cash, but that’s sensible as you’re buying a house within 12 months. You’re right not to risk your deposit by putting it into risk assets this close to needing it.
Crypto-assets are completely valid in a diversified portfolio, but even bullish crypto experts say that they shouldn’t account for more than 2 to 2.5 per cent of your portfolio. Your £2,000 investment fits that allocation size, so resist the temptation to buy more – sit tight and hang on.
You have to take the view that next week your cryptocurrencies could double or halve in value, although in the long term there are many reasons to expect the trajectory will be upwards. Position management is going to be important. Mentally, write off that £2,000 and remain unfazed by any downside. But also set yourself a target for the upside.
If your cryptocurrencies double or treble in value, harvest back the £2,000 you initially put in and reinvest it in other assets. Then run the rest of the holding to a new higher target, before repeating the process and harvesting more each time. In this way, you could stay on board with the growth and momentum. And even if it all goes pop at some point you would still have made multiples of your initial investment sum, which meanwhile could carry on growing via other assets in your portfolio.
Gold and silver are more old school anti-inflation hedges and, again, you have sensible-sized positions given that these are volatile assets that produce no income.
The bond funds in your 60:40 equity/bond portfolio are heavily skewed to investment-grade corporate bonds (credit). This is a popular tactical asset allocation choice at the moment due to low interest rates and the high price of government bonds. For your more strategic portfolio, I would have a dedicated exposure to high-quality inflation-linked sovereign bonds. The credit holdings are valid and good long-term investments, but you want a strategic allocation to the zero-default risk rate of return that only quality government bonds offer.
With regard to the equities, Vanguard FTSE All-World UCITS ETF will provide exposure to US and other developed market growth, while Vanguard Emerging Markets Stock Index will cover off China and other high-growth markets. Going pretty much half and half between emerging and developed markets may seem bold, but this is reasonable over the quarter of a century that you’re investing for, because that is where global economic power is shifting. The equity risk is also diluted by bonds and you have DB pensions to fall back on.
Most importantly, by making regular contributions and building on a decent starting sum, you are taking full advantage of the power of compounding to help you achieve your objectives. You may not make a 6 to 7 per cent annual total return after inflation with a 60:40 equity/bond allocation. But that won’t matter as compounding and regular contributions could help you build a pot that generates something close to your target retirement income – especially if you count what the DB pensions provide.
I really like the idea of having a separate fun money account for investing in risky shares. This allows you to make mistakes and learn about stockpicking without those errors affecting your long-term future. This is a good and enjoyable way to build experience. I’d let the 'play portfolio' grow over time and start having minimum holding sizes as you get more into investing.