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Will I be able to buy a half million pound house in six years?

This investor wants to spend £500,000 on a first home in about six years
Will I be able to buy a half million pound house in six years?
  • Marc wants to spend about £500,000 on a home in six years and save for the future
  • He is unlikely to grow his investments to that value in six years
  • He could consider reducing his allocation to cash but should be wary of very esoteric assets
Reader Portfolio
Marc 26
Description

Pension and Isas invested in funds, cash. 

Objectives

Buy a home worth £500,000 in five to six years, minimise size of mortgage, invest for longer term, beat inflation, diversify away from UK equities, add ESG investments.

Portfolio type
Investing for goals

Marc is age 26 and earns £55,000 a year as an accountant. He lives with his partner who owns a house worth about £130,000 with a mortgage of £78,000.

“We are saving up to buy a home worth about £500,000 in five to six years, with as small a mortgage as possible,” says Marc. “I am also saving for our longer-term future and, in the current economic environment, my main priority is beating inflation.

“I don’t contribute to my workplace pension, which is worth about £18,000, but my employer puts in £300 a month. Other than that, I have been investing for a year and add about £500 a month to my investments. I aim to fully use my annual individual savings account (Isa) allowance and also invest any money I have left over after doing that.

"I’m happy to take some risk although wouldn’t want an investment to fall by more than about 10 per cent. This happened to my holding in Impax Environmental Markets (IEM). When this happens, at what point should I start to rebalance?

"When choosing direct share holdings, I assess their price-to-earnings ratio and discounted cash flow, and market news about them. But I find it much harder to assess funds.

"Although the UK equity market is boring, I think that it has room to grow relative to other large developed economies. But I’m concerned that my investments are too exposed to UK equities so I'm considering alternative assets funds such as HICL Infrastructure (HICL) or Renewables Infrastructure Group (TRIG).

"I am also thinking of investing in distressed assets or companies that focus on insolvencies, although I'm not impressed with Begbies Traynor (BEG), a London-listed business recovery and property services consultancy. And I am thinking of commodities related investments, although I wonder whether they still have room to grow?

"I would like to increase my investments’ exposure to the US and Asia. Emerging markets also seem to have appealing growth prospects, so I’ve added exposure to Vietnam and India. I would like to invest in China as well – preferably in an area that is unlikely to be subject to that country's government’s changing regulations.

"Given recent global climate catastrophes, environmental, social and governance (ESG) investing is a high priority, as is diversifying my portfolio. This is despite the ongoing oil rally and renewable energy controversies. So I’ve been monitoring companies such as Ricardo (RCDO), BP (BP.) and Philip Morris International (US:PM) as they’ve been improving their ESG credibility, but I'm not sure if they meet my ethical criteria. I would like some tips on how to distinguish between green companies and 'green washers'."

 

Marc's total portfolio
Holding Value (£)% of the portfolio
Workplace pension18,00027.29
Help to Buy Isa15,00022.74
Cash14,00021.23
Royal London Short-Term Money Market (GB00B8XYYQ86)5,5008.34
Vanguard SRI European Stock (IE00BPT2BL97)2,4003.64
NS&I Premium Bonds2,0003.03
iShares Mid Cap UK Equity Index (GB00B7VT0938)1,8802.85
iShares Index Linked Gilt Index (GB00B83RVT96)1,5202.3
Impax Environmental Markets (IEM)1,0001.52
iShares Emerging Markets Equity Index (GB00B84DY642)1,0001.52
Ashoka India Equity Investment Trust (AIE)9501.44
Legal & General Global Real Estate Dividend Index (GB00BYW7CL14)6000.91
Royal London Cash Plus (GB00BMNR1H58)6000.91
Capital Gearing Trust (CGT)5000.76
Vietnam Enterprise Investments (VEIL)5000.76
Rathbone Greenbank Global Sustainability (GB00BDZVKB97)3000.45
Baillie Gifford Japanese Smaller Companies (GB0006014921)2000.30
Total65,950 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.

 

Chris Dillow, Investors' Chronicle's economist, says:

House prices have done well in recent years largely because interest rates have fallen. If that trend goes into reverse, the good times for property will end. There are non-financial reasons to want to own a house but don’t regard it as a foolproof investment.

You say that beating inflation is your main priority but are holding a lot of cash. And whatever other merits cash has, it will not do that.

It’s also odd because you have another huge safe(ish) asset that should enable you to take on more risk with your financial wealth – your job. You are better placed than many older investors to take on equity risks because you should have many years of well-paid employment ahead, so can offset equity losses by saving more. Your human capital is insurance against your financial capital. So there is a case for rebalancing your investments. But I would caution against several ways of doing this.

Distressed assets are especially risky and John Campbell, professor of Economics at Harvard University, has shown that, on average, such risk doesn’t pay off. You can make great returns if you buy at the right time, such as last November, but it is unlikely that you will be able to do this.

Don't invest in emerging markets because you think that they have “appealing growth prospects”.  Across countries over longish periods, there is no correlation between economic growth and equity returns. This isn't surprising as economic growth should be in the price beforehand, and it can benefit unlisted or foreign companies rather than incumbent listed ones. There is sometimes a cyclical case for buying emerging markets, but it's not obvious that there is one just now, given the likelihood of US interest rates rising next year.

I also wouldn't rush into commodities as their prices are cyclical. One good lead indicator of these is Chinese monetary growth because this is a predictor of that nation’s economic growth and demand for commodities. And this is pointing to a downturn which could be a risk for equities generally. A world of weaker demand for commodities is also a world of slower economic activity, which might reduce appetite for risk and share prices around the world.

For this reason, while there’s argument for reducing your cash holdings, I would not go all-in on equities. And when considering equity investments remember that there is always a case for a global tracker fund, which should be your default option.

I’m wary of ESG investing. There’s a lot of 'green washing' and we sometimes pay a price for our moral principles. 

That said, it’s quite possible that green energy will be a future price bubble. Hard to value companies which look like they will be part of an exciting future have always been bubble-prone, so green investors might get into such a bubble early. I’d consider some green private equity investments as new, small companies focused on specific green technologies are less likely to green wash than older, larger companies.

 

Ben Yearsley, investment director at Shore Financial Planning, says:

You have made a very good start to investing and should continue in a similar way. But buying a home worth £500,000 to £600,000 in five to six years with only a small mortgage is unrealistic. Even if you use your full Isa allowance every year, you are highly unlikely to build up a sum of this size unless you take large positions in high-risk direct share holdings. 

High inflation is eroding the real value of the cash in your Help to Buy Isa. And you cannot use it to buy a house worth more than £250,000 or £450,000 in London.

Your £14,000 cash is currently a big portion of your assets and probably earning very little. If it’s an emergency fund, hold it in an instant access account with the best interest rate available. But if it’s part of your savings pot to buy a house in five to six years, consider investing it.

Review what your workplace pension is invested in. Many people settle for their employer's default fund, but this is often not appropriate for them. See what the other options are, because at your age you should be in higher-risk equities as you are unlikely to draw your pension for around 40 years.

When one of your investments falls by 10 per cent or more, reassess it. See if your reason for originally investing in it still stands or whether something has fundamentally changed so that its future prospects no longer appear as good. If the investment's prospects still seem as good, consider topping up your holding in it. But be wary of value traps.

Investing in China incurred huge political risk even before the recent government crackdown on certain industries. However, the country's 'common prosperity' policy should be beneficial in the long run as it is expected to increase those defined as 'middle class' by 330m by the end of this decade. I suggest getting exposure via Matthews China Small Companies Fund (LU2075925870) because smaller companies should face less regulatory risk.

The funds you have recently added – Ashoka India Equity Investment Trust (AIE), Capital Gearing Trust (CGT) and Impax Environmental Markets – are good. I’m a big fan of India generally as it is a good five to 10 years behind the China story but with structural advantages.

But ensure that dealing costs don’t disproportionately eat into your investment returns as you have a number of relatively small holdings in your Isas.

You could get exposure to the US via a fund such as Polar Capital Global Insurance (IE00B61MW553). It could be a great long-term compounding story that will benefit from rising interest rates, and can still prosper even if they don't rise. Insurance companies' share prices and book values are currently very disconnected.

Asia has generally had a lacklustre 2021, but due to how this region is faring in terms of Covid-19, 2022 could be very good. As well as your current holdings, consider a broad-based Asian fund such as FSSA Asia Focus (GB00BWNGXJ86). Its managers have always had sustainability at the heart of their investment philosophy so it could fit in with your ESG criteria. Also look at Alquity Asia (LU1070051708) as this company's funds invest via a sustainable approach.

The choice of alternative asset investment trusts continues to widen and they provide access to areas such as space, hydrogen and digital assets. But some of these are very new so tread carefully.

There are also a few open-ended infrastructure funds, such as ARC TIME UK Infrastructure Income (GB00BZ17GL78). This fund is useful for portfolios which are too small to get exposure to a decent spread of alternative assets by holding several funds. It also doesn't invest in some of the newer, wackier investment trusts.

Also have a look at First Sentier Responsible Listed Infrastructure (GB00BMXP3956) for both sustainable and alternative investment exposure.

Alternatively, I think the outlook for commodities is good for the foreseeable future as many government stimulus packages involve infrastructure investment which will need commodities. You can get exposure to commodities via TB Amati Strategic Metals Fund (GB00BMD8NV62).

Regarding greenwashing, professional fund managers have also been caught out by some of the scandals at companies that were rated as having good ESG standards. You need to be pragmatic, and ultimately it is a personal choice as to whether you think a company or fund is doing enough. I believe that engagement is better than simply avoiding companies.