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Should I buy a home or keep investing?

A reader weighs up property versus further investment
Should I buy a home or keep investing?
  • A reader wonders whether to finance a house deposit by selling up investments
  • He would also like to consolidate his portfolio in a balanced way
Reader Portfolio
Mark 33
Description

Workplace pension and Isas

Objectives

Growth and portfolio consolidation

Portfolio type
Investing for growth

Mark is 33. He has a salary of £58,000 a year, and can also earn between £15,000 and £40,000 a year on top of this. He has no dependents or debt.

“I'm in two minds about whether to buy a home or keep investing,” says Mark. “I'm a bit lost, in truth. How much of my portfolio would it be wise to sell to help raise a deposit, and how much do I need to save for retirement?

"As well as my individual savings account (Isa) and Lifetime Isa (Lisa), I have a workplace pension worth nearly £52,000 to which I contribute 6 per cent of my salary and my employer contributes equivalent to 12 per cent of my salary. I also have a small pension with a former employer.

“I have been investing since March 2018 but haven’t set any goals. I aim for growth and my investment accounts are set to automatically reinvest income. The portion of my investments which I intend for retirement can be pretty risky. But another portion has more of a medium- to short-term investment time horizon.

"I do not invest via much of a strategy or according to any particular thought process, but add things I like. I think I hold too many funds, so am thinking of selling some and consolidating my portfolio, but want to do this in a balanced way. I recently got 'burnt' by the Ukraine war because I was over exposed to technology and Asia stocks which have suffered this year.

"I pay via direct debit into Vanguard LifeStrategy 80% Equity (GB00B4PQW151) every month and recently added Pyrford Global Total Return (IE00BZ0CQJ19)."

Mark's total portfolio  
HoldingValue (£)% of the portfolio
Scottish Widows Pension Portfolio Two CS7 (GB00BMQDLY75)51,76024.47
Cash42,00019.86
Vanguard SustainableLife 60-70% Equity (GB00BZ830054)31,24914.78
Vanguard LifeStrategy 60% Equity (GB00B3TYHH97)26,39512.48
Vanguard LifeStrategy 80% Equity (GB00B4PQW151)23,75611.23
Jupiter Strategic Bond (GB00BN8T5935)6,8223.23
Pyrford Global Total Return (IE00BZ0CQJ19)5,9802.83
Baillie Gifford Managed (GB0006010168)4,9462.34
Lindsell Train Global Equity (IE00BJSPMJ28)3,7311.76
Fundsmith Equity (GB00B41YBW71)3,2031.51
BlackRock World Mining Trust (BRWM)2,7041.28
AXA World Funds - Framlington UK (LU1319654270)1,9180.91
Allianz Technology Trust (ATT)1,8740.89
TR Property Investment Trust (TRY)1,7180.81
Legal & General US Index (GB00BG0QPL51)1,2660.6
Former workplace pension 1,0000.47
JPMorgan Emerging Markets Investment Trust (JMG)9370.44
Sylvania Platinum (SLP)2310.11
Total211,490 

 

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:

You ask how much you need to save for retirement. The answer is: we don’t know. For someone approaching retirement, there is a rough rule of thumb that your wealth should be 25 times your annual spending, or a little less if you don’t want to leave a bequest. This is a useful first approximation but there are many uncertainties around it.

We don’t know what investment returns will be in the future. You can’t know how much your spending will be as your tastes, habits and dependents might well change. And you don’t know whether your desire to leave bequests will change. So setting a target at your age is unwise.

But you are doing the right thing by investing regularly in a pension and at a sufficiently early age to benefit from the power of compounding. If someone like you cannot afford a decent retirement it’ll be the fault of the wider economy rather than yours.

As for whether you should buy a property or carry on investing, I would suggest the latter. House prices are more overvalued than equities and more vulnerable to rising interest rates. Also, thanks to deadweight costs such as solicitors’ and estate agents' fees, there is an element of irreversibility in house buying. It is easier to sell equities and buy a house than vice versa. This argues for staying invested in equities and retaining the option of buying a property later. You might even be able to pick up a bargain if rising mortgage rates force some people to sell at lower prices.

You are right to have the core of your portfolio invested in Vanguard LifeStrategy funds. You cannot pick the equity winners when investing over 30 years. For example, many of the companies that dominate the market now, including Amazon (US:AMZN), Meta Platforms (US:FB), Tesla (US:TSLA), were not even listed 30 years ago. So why assume that the next 30 years will be different? Because we cannot pick winners, the best thing to do is back the field – which is what tracker funds do.

For this reason, don’t worry about investing for growth. There’s no reason to suppose that growth stocks will outperform over the long run as these face a big risk. If long-term interest rates continue to rise, growth stocks might under perform. This is because rising interest rates mean that investors discount future cash flows more heavily and because growth stocks offer more of these than others they under perform when interest rates rise. This is one reason why US tech stocks have fallen recently.

I think it’s reasonable to have a decent cash holding. Cash protects investment portfolios from the risk that rising interest rates might unsettle the market in the short-term. And even in the long-term, there is a danger, albeit unquantifiable, that equities will do badly. Hence a need for cash.

As long as the bulk of your portfolio is in tracker funds, there’s not much harm in holding a few other stocks or funds – if only as 'gambles' from which you might learn useful lessons.

But be wary of expensive actively managed funds. Their fees compound over time which makes them expensive for longer-term investors.

 

Rob Morgan, chief analyst at Charles Stanley, says:

Your Isa portfolio is very much the core of your investments because it is simply comprised of three Vanguard funds. But your Lisa combines a few core positions such as Legal & General US Index (GB00BG0QPL51) and Baillie Gifford Managed (GB0006010168) with more specialist investment areas.

You need to think about what your goals are for your different investment pots, in particular, whether you going to use your Lisa in part or in whole to buy a house. If you are, I suggest dialling down the Lisa's risk and significantly so if you plan to buy a home in the short term, say three years.

You have some higher-risk, specialist holdings in the Lisa. Although worthy in their own right, BlackRock World Mining Trust (BRWM) and Allianz Technology Trust (ATT) are likely to be very volatile. But if your Lisa pot is for retirement then your current allocation is more appropriate. Your Isa allocation is more appropriate for a house purchase in the coming years. But again, you would still need to de-risk it a bit in the lead up to when you cash it in to buy a home, as you probably are not going to just use your cash savings for this.

A larger deposit could help you to secure a good mortgage rate. I would suggest using a bit more of your cash, and Isa and Lisa to fund this, rather than getting a less favourable mortgage rate and hoping your investments' returns continue to do well. Saving on mortgage payments may allow you to put aside more for regular investing. And in respect of Lisa and pension contributions benefit from a government bonus and tax relief, respectively. It would be a good idea to keep some of your cash as an emergency fund after a house purchase – as a rule of thumb about six months' of your income. So if you hold about £20,000 in cash it would put you in a resilient position.

The level of contribution you and your employer make to your workplace pension is a really good amount. Together with your Lisa contributions, this goes a long way to building a really substantial retirement pot, although you might use the Lisa to buy a home. You should be really pleased with this position.

Your current workplace pension is invested in Scottish Widows Pension Portfolio Two CS7 (GB00BMQDLY75), a diversified fund whose asset allocation and rebalancing is managed for you. It has heavy equity exposure so seems reasonable. However, your workplace pension could be more aggressive as it has 25 years or more over which to invest. Your workplace pension scheme may allow you to diversify into other funds.

You also have about £1,000 in a previous workplace pension which could be tidied up, so you don’t lose track of it.

Overall, your investments have been built up in an ad-hoc manner over time which tends to result in a piecemeal portfolio without a coherent shape. But you seem to be aware of this. When you have set goals for the different investment pots, consider what asset allocation you want to have within each of these and then pick appropriate investments to do this. Deciding how much exposure you want to different assets such as equities, bonds and alternatives investments, will provide a framework and keep you on track. I would generally suggest having close to 100 per cent of your retirement pots in equities, and 60 per cent of your pots for the medium term, for instance five to seven years, in equities. And de-risk anything you are going to draw on in less than five years to eliminate much of the volatility.

You are not a million miles away from this, and some thinking about your goals, and some consolidation and trimming should get you to where you need to be. The number of funds you hold is not unmanageable but you do need to have a clear idea of why you have each holding and the role it plays in your portfolio. Going forward, market conditions are likely to be trickier than those of most of the past decade and having a well diversified portfolio will help navigate them.

You are not alone in feeling over exposed to tech and growth more generally. And while this is an important element in any portfolio it’s good to balance it with some value funds, or otherwise stick to a passive tracker fund in that particular area as it encompasses the whole market and keeps costs low.