How should I save up for a family home and school fees?

Craig is age 29 and studying for a Master of Business Administration (MBA) degree in the US, and hopes to earn around £100,000 a year after finishing it. He owns a property in London worth around £900,000 with a mortgage of £220,000, and receives £11,000 a year from letting it which he uses to pay the mortgage.

"I am not married and don't have dependents, but I expect this to change in the near future," says Craig. "Depending on my salary, I may need to use the money in my individual savings account (Isa) which is currently worth about £219,000, to purchase a family home in five to 10 years or fund school fees as I would like to send my future children to top private schools.

"Otherwise, I don't plan to withdraw money from my investments as I will hopefully be able to rely on my salary. So I'm aiming for long-term growth with my investments, ideally a total return of 6 to 7 per cent a year, on average. But I'm unsure what the best way to do this is.

"My father managed my investments for me until 2020, when I invested all my spare cash after the market collapsed following the outbreak of Covid-19. I managed to time the market well and get in near the bottom. I had a good run between April 2020 and April 2021, but have not fared as well between April 2021 and April 2022. I have failed to beat the market over the past year so am wondering whether to hand over the management of my self-invested personal pension (Sipp) to a low-cost manager that uses index tracker funds such as Netwealth or Nutmeg.

"I also have an investment account run by a wealth manager which has performed ok over the years. But this wealth manager has higher fees and I'm not confident in its ability to beat the market. I would like to continue to personally manage my Isa but I am inexperienced. I would also like to diversify my portfolios but am unsure of how best to do this.

"I sell some of my holding in JPMorgan Elect - Managed Growth (JPE) out of my general investment account each year to offset as many gains as possible against my annual capital gains tax allowance. I reinvest the proceeds in my Sipp and Isa. I also receive dividend income of about £20,000 a year and reinvest this.

"I would say that I have a high appetite for risk given my long-term investment horizon and growth objective. I generally try to hold strongly performing funds as the base of my portfolio. I then add speculative opportunities such as Investors' Chronicle columnist Simon Thompson's smaller companies recommendations, though have had mixed results with these. I get most of my investment ideas from investment magazines.

"I also try to 'buy the dips' if I think a company appears to offer long-term value, but seems oversold. But while I find it easy to find good stocks it is harder to know when to sell holdings without following each company very closely, which requires significant time. 

"I also have a small pension after serving in the Army for six years of £44,201 which will pay me a tax-free lump sum of £19,297 and annual payments of £2,894."

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 are unsure about the best way to maximise future growth. Join the club. There are two sorts of investor: those who don’t know where to find future growth and those who don’t realise that they don’t know this.

As screenwriter William Goldman famously said, nobody knows anything. A few months ago, many investors thought that big US tech stocks were the road to growth. They are now revising that opinion. Funds which had bet on this, such as Scottish Mortgage Investment Trust (SMT), have fallen around 50 per cent since November's peak. This corroborates the research of economists such as Alex Coad and the late Paul Geroski who have shown that corporate growth is largely unpredictable.

What’s true of companies is also true of countries. Research shows that there’s no correlation between many countries' gross domestic product growth and equity returns. In the past 10 years, for example, several eurozone markets have out performed China. So don’t invest in emerging markets on the basis that economic growth will translate into share price rises.

You also find it harder to know when to sell. Again, you're in a big club. Alex Imas, assistant professor of Behavioral Science at the University of Chicago Booth School of Business, and colleagues have shown that this is also the case for professional fund managers. Although their buys, on average, beat the market, their sells result in worse returns than selling stocks at random would.

This is because they pay close attention to their buying decisions but are careless about selling, often doing this simply because a stock has risen. You must work as much on your selling as on your buying ideas.

But this does not mean that you should necessarily entrust the management of your Sipp to a low-cost wealth manager which uses index trackers. You can do this yourself by simply buying some exchange traded funds (ETFs), ideally ones which track the MSCI or FTSE World indices.

This also addresses your question on how to diversify as global equities tracker funds provide good equity diversification. They are, in effect, funds of equity funds.

But equity diversification has its limits because in serious bear markets most stocks fall. For some investors, protecting their portfolios against this requires holding cash, gilts or gold. You, however, have another asset – your earning potential. You can protect your assets from equity bear markets by saving out of your salary, when you start to get one. Your human capital diversifies risks to your financial capital. It is only if your job or bonus is at risk in an equity bear market that you need to hold cash or bonds.

This doesn't mean that you should only hold tracker funds and nothing else – though you could.

Perhaps you should change your perspective. Don’t try to work out which stocks will beat the market. Instead, consider which strategies might be able to do this. Over time and on average perhaps just two strategies can beat the market – defensives and momentum.

Picking defensive and momentum stocks, however, requires work because no stock stays defensive or keeps momentum for long. Polymetal International (POLY), for example, seemed defensive until Russia invaded Ukraine. If you can put in the work, there might be a case for stock picking within these parameters. But whether you have the time to do this when you are back in work is another matter. 

Freddie Cleworth, chartered wealth manager at EQ Investors, says:

You will meet your objective of long-term capital growth through planning as well as successful investments. 

It's good that you regularly fund an Isa and Sipp. But if you work in the US when you have finished your studies, this could affect your ability to fund UK tax wrappers as Isa and Sipp allowances are only available to UK residents. If this happens you should get specialist UK-US tax advice.

If you work in the UK when you have finished studying for a salary of around £100,000 a year pension contributions will be even more beneficial as you will get higher rate tax relief on your contributions. Pension contributions might also mitigate the effective 60 per cent tax rate on earnings between £100,000 and £125,140.

Private school fees can be significant. At the higher end of the scale, these can be around £20,000 a year for a day pupil and £40,000 a year for a boarding pupil. And the obligatory extras like uniform, sports equipment and trips, as well as fee inflation, mean that the overall cost of sending a child to such a school for seven years could easily add up to a few hundred thousand pounds. So the earlier you start saving and investing for this, the better.

As you use up your own £20,000 Isa allowance each year, when you have children consider saving into junior Isas for them. You and others such as grandparents can contribute up to £9,000 per tax year to these.

Although you have a sizeable amount of liquid assets your future earnings will be crucial to the long-term success of your plan and achieving your objectives. When you have a job, check what financial protection benefits it offers, such as income protection and death-in-service. If you marry and start a family, it will be important to ensure that they and you are fully protected in event of unexpected circumstances such as accidents, illness or dying. Taking out this kind of insurance while you are young and healthy can be much cheaper than if you do this later on in life.

An average annual return of 6 to 7 per cent is eminently feasible with an appropriate risk asset allocation, though to achieve this you will have to accept some market volatility. You have done well to put together globally diverse investment strategies with core holdings alongside smaller ‘satellite’ positions using funds and direct share holdings. Don't scold yourself for a bad year of investment performance between April 2021 and April 2022. The first part of this year has also caught out many experienced professional investors, and portfolios with growth-equity biases in sectors like healthcare and technology have been hit hard.

We have been adding to our clients' positions in renewable energy infrastructure and more large-cap value-focused equity funds to combat higher inflation and market volatility. We favour ethically-screened index tracking portfolios which we think will reduce corporate risk, while targeting themes such as renewable energy, digital security and decarbonisation.

If you don't want to manage your Sipp, you could invest it in a professionally managed portfolio with a high allocation to equities invested in index tracking funds. You could then compare its asset allocation and investment styles to the portfolios you continue to run.