How can we grow our asset base as aggressively as possible?

Sanjay is 39 and earns about £230,000 a year. His wife earns about £130,000 a year. They have two children aged seven and four.

Their home is worth about £1.1mn and has a mortgage of £581,000. They also own six buy-to-let properties worth £3.1mn in total with mortgages of £1.39mn. These produce an annual income of £78,000.

“We have started junior individual savings accounts (Isas) for our children [see below] which are currently worth about £10,100 and £8,800," says Sanjay. "We also intend to pass our assets onto our children, given our property exposure and healthy earnings.

"We don't have any debt other than our mortgages and our outgoings are quite low, so we save a lot each month. The priority is to grow our asset base as aggressively as possible, given our investment timeframe of around 20 years. We would like our investments to make an average annual return of at least 10 per cent a year – ideally 15 to 20 per cent on an annualised basis – until I am about age 65.

"But we are not sure whether to invest more of our future earnings in investments such as growth stocks, given our long-term investment timeframe, or more buy-to-let properties, or use the money to start paying down mortgages. Because interest rates have been so low and the mortgages are not proportionately very big, to date we’ve not been inclined to make over payments on them. 

"If we invest in more equities, what kind should we add? We have many high-growth stocks which are being pummelled at the moment, but do they make sense as a longer-term strategy? 

"I have been investing for five years and have a very high risk appetite – I've seen the value of my investments swing by 40 per cent. Although this is not my preference, I can stomach such swings, given my long-term hold strategy, and accept that some years will be better than others.

"I’m impressed with asset manager Baillie Gifford’s style of investing, particularly that of Scottish Mortgage Investment Trust's (SMT) managers, and aim to make significant returns over a long investment period of 15 to 20 years. I focus on what I consider to be world-class stocks, in particular growth and technology companies, and aim to hold them for a very long time. Recent purchases include NVIDIA (US:NVDA), Mercadolibre (US:MELI) and Paypal (US:PYPL).

"I am now thinking of investing in cryptocurrencies, although feel some degree of nervousness about doing this.

“We hold some of our investments in Isas. I have about £30,000 in a trading account, and my wife has around £17,000 in a self-invested personal pension and £95,000 in an employee share scheme. 

"I'm also trying to build up my defined-contribution workplace pension, which is currently worth about £110,000. I contribute 8 per cent of my salary to it and my employer puts in equivalent to 12.4 per cent. But due to the level of my earnings I might need to forfeit this benefit and take the cash because my threshold and adjusted income exceed the limits."

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 have been right to prioritise putting new savings into equities rather than repaying mortgages. But it’s very possible that the gap between equity returns and mortgage rates will narrow in the coming months or even reverse. So repaying some of your mortgages is a safer option. And it gives you options in the longer term – if you are mortgage-free you can work less or retire – something valuable as you become older.

If the future is like the recent past, your hope of a return of 10 per cent a year from high-growth stocks isn’t so outlandish. The Nasdaq composite index, for example, has made this sort of return over the past 10 years.

But the future might not resemble the past. The big rise in US growth stocks might have been partly due to a one-off rerating. Investors have paid more for larger stocks with brand power and/or barriers to entry because they’ve wised up to US investor Warren Buffett’s observation that companies need “economic moats” – the power to exclude potential competitors – if they are to raise their earnings. Until recently, low and falling bond yields have disproportionately benefited big companies, as Atif Mian, professor of economics, public policy and finance at Princeton University, and other academics have pointed out. And the pandemic has accelerated the shift to the digital economy, benefiting companies such as Amazon (US:AMZN).

But those forces are now weakening and one of them – the boost from low interest rates – is going into reverse.

However, there’s a bigger danger than rising interest rates – longer-term earnings growth is much less predictable than you might think. And share prices can be clobbered when earnings fall short of expectations, as we’ve recently seen with Netflix (US:NFLX), Meta Platforms (US:FB) and Peloton (US:PTON).

History warns us that if growth expectations are revised down more generally we could see a vicious derating. When the tech bubble deflated after 2000, the Nasdaq index fell by 75 per cent and didn't return to its 2000 peak – even in nominal terms – until 2014. And that wasn’t unprecedented: adjusted for inflation, the S&P 500 index didn't return to its 1929 peak until 29 years later. A long-term hold strategy means you can look through short-lived dips. But you need a very long-term perspective to overcome the nasty deratings that can follow overvaluations.

So you need other things. You have already diversified into other segments of the market, such as UK and European defensives. Shell (SHEL), for example, has done nicely during Nasdaq’s dip. But there is a limit on what equity diversification can achieve, and big falls in US equities could eventually drag down shares around the world.

You have a decent allocation to cash, but could also consider an exit strategy. Selling when share prices fall below their 10-month or 200-day moving averages is not perfect but can protect against long bear markets, which destroy wealth.

Dale Scorer, senior financial planner at EQ Investors, says:

Interest rates have been low so investing surplus income rather than paying off the mortgages should have worked well. However, as interest rates have started rising it may be a good time to consider splitting your surplus income between saving and paying off more of the mortgages. This way, you pay the mortgages down quicker while continuing to save each month. But ensure that there are not any early repayment penalties for doing this and, if there are, stick within the limits.

While you have outstanding mortgages and your children are dependent on your wife and yourself, have sufficient protection in place to cover the mortgages in the event that one of you becomes ill or passes away. You may have cover through your work, but if it is not sufficient also consider personal cover to top up any shortfall. As the mortgages start to reduce, this cover can reduce too.

But if you are happy for the properties to be sold to pay off the debt in the event of illness or death, you do not necessarily need to take out protection.

You hold some equity investments outside Isas. If, in any year, you and your wife aren't going to fund your Isas out of cash, sell some of the shares held outside Isas and pensions and reinvest the proceeds in Isas. This is a way of moving money from a taxed account to a more tax-efficient account. Investments within Isas do not incur capital gains tax (CGT) on gains.

Selling holdings outside Isas could trigger capital gains or losses, so you might have to pay tax. However, if the amount of any gains falls within the annual CGT allowance of £12,300 per person you might not have any tax to pay.

You are thinking of forfeiting employer pension contributions for cash due to your level of earnings and the pensions taper. But ensure that you are receiving the full pension benefit in cash before forfeiting pension contributions. If this is not possible, it could be worth paying the annual tax charge rather than losing the pension benefit entirely.

If your pension contributions are capped by the pensions taper, consider investing in a Lifetime Isa (Lisa) for retirement. You can still open a Lisa (you have to be under age 40) and invest up to £4,000 a year into it until you're 50. The government adds a bonus worth 25 per cent of what you put in each year, up to a maximum of £1,000. You can withdraw from your Lisa from age 60 tax-free, but have to pay a 25 per cent charge if you withdraw from it or transfer it to another type of Isa before this age. 

Make sure that the investment strategies in your wife’s and your own workplace pensions are in line with your current risk profile and appetite. Often, workplace pensions are invested in a default fund that may not align with your personal risk appetite. And ensure that you both have nominated beneficiaries for your pensions in the event of death. Pensions are not covered by wills so this has to be done separately.

Due to your age and investment time horizon of 15 years plus, an adventurous risk profile seems appropriate. But ensure that your equity portfolios always remain well-diversified from a geographic and sector perspective, and don't have too much exposure to any one company.

You are right to be cautious about cryptocurrencies. These are unregulated and anything you put into them could lose all its value and you would have no protection. Don't put a large portion of your wealth into cryptocurrencies and, if you do put anything into them, don't invest more than you are prepared to lose.