The importance of capital preservation even when investing for growth

"My objective is to grow my capital as much as possible over 15 to 20 years," says Latif. "I want to save money for my two-year-old daughter's future, for costs such as education, and to build a nest egg for me and my wife's retirement. I am not interested in deriving any income from my portfolio so hold the accumulation units of all my funds.

"I am willing to take risks as long as I am confident they can provide me with very good returns over the long term, and will accept short-term losses. I expect market downturns, and when these occur I intend to purchase more units in my funds at lower prices. I understand that is easier said than done as I have never experienced a major correction as an investor. But I have heard and read that one may be coming so am building up cash to be ready to invest. As I am in full-time employment, I intend to add to my funds using the income from my job in the event of a major correction. But I feel I am still learning and developing my investment strategy.

"I very much prefer the arguments in favour of active management, so only invest in active funds. I look for ones that target long-term capital growth with a high active share, where it is evident that the manager is targeting specific themes.

"I particularly like the idea of investing in funds that hold unquoted companies due to their growth prospects over the long term. While I am familiar with the issues over fund fees, I am comfortable paying slightly higher fees for managers who are willing to have significant exposure in their portfolios to very compelling themes, for example, biotechnology, robotics and ageing populations.

"I do not feel it necessary to purchase sector-specific or thematic funds because some broader active funds include exposure to these. I want to maintain a very concentrated portfolio as I would like experienced fund managers to make an impact on my overall returns. I have never understood the idea of holding many funds in a single portfolio, especially ones that have the same objective and some of the same holdings as each other. I want the total number of funds in my portfolio to be in single digits.

"I try to invest in a single fund, or at most two, in each geographical region. I try to find funds with a manager who seems to be the best and most knowledgeable on that particular region – preferably one who lives where the fund invests.

"I want the funds I invest in to have been positively rated by more than one research company, such as Morningstar, SquareMile, FE Trustnet and FundCalibre. 

"I prefer open-ended funds to investment trusts, so I do not intend to add more of the latter. I recently sold Biotech Growth Trust (BIOG).

"My last purchase was CF Woodford Equity Income (GB00BLRZQC88) and I intend to add to it over the coming months. I am also considering investing in Veritas Global Focus (IE0034106280), First State Japan Focus (GB00BWNGX432), MFM Slater Growth (GB00B7T0G907) and Schroder Asian Alpha Plus (GB00BDD27J12).

Latif's portfolio

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

THE BIG PICTURE

Andy Collinson, senior financial planner at Informed Financial Planning, says:

I would suggest giving some thought to the tax wrappers in which you hold your assets as this will have some influence on your overall returns. Your main objectives are to save for your daughter's education, and for you and your wife's retirement. Different investment timescales are likely to impact on the overall strategy, so I would encourage you to consider pensions. Although it sounds as though you would like to retire before age 55 that doesn't mean you will need to access all your funds before that age, and some should probably be for the longer term.

Your pension input will need to be considered in relation to any existing pension contributions you and your wife already make. You get tax relief on contributions to pensions, the benefit of which will be improved further if you become a higher-rate taxpayer.

Stocks-and-shares individual savings accounts (Isas) are also an excellent way to save for purposes such as yours as the assets within these are accessible at any age. As your attitude to risk is quite high, once you have built up some further investing experience and a decent amount of assets, you could consider venture capital trusts (VCTs), which offer 30 per cent tax income tax relief, and Alternative Investment Market (Aim) portfolios. Both of these could offer the potential growth and risk you are seeking.

Adrian Lowcock, investment director at Architas, says:

For an investor just starting out, you have a pretty good idea of what you want to achieve. But one thing you might need to reconsider is your timescale. Although it is good to have a longer-term focus, you will only be 45 to 50 in 15 to 20 years. Although that timescale is in line with your goal of saving for your daughter's future, saving for your retirement is likely to take longer so you could be invested for 30 or even 60 years.

You could consider a junior Isa for your daughter to help her when she turns 18. The junior Isa allowance is currently £4,128 and investments held within it benefit from tax-free growth and income. Having such an account could help you to educate your child on the importance of long-term investing. The downside is that you lose control of the money when she turns 16, and she can access it and spend it how she sees fit at age 18.

As you have no need to access the money immediately, make sure you use your Isa and pension allowances. Pensions build up more quickly due to the tax-free contributions, but you cannot access the money until you reach age 55, so they won't help you to support your daughter. Isas should help you do this as the money held in these is more readily accessible, and the investments within them grow free of any additional tax.

I have a number of concerns about your investment approach. Taking high risks to get a higher return sounds logical, but often the reality is very different. People don't act rationally when they lose money, often misjudging their attitude to risk. And higher risk is by no means a guarantee of a higher return. Rather, successful investing is about diversification – having a mix of different assets to achieve your long-term goals.

Darius McDermott, managing director at Chelsea Financial Services, says:

You have made a great start by beginning to save early, taking a logical approach to portfolio construction, and being realistic about risk and expectations. We agree that equity markets look high at the moment, but if we get a market downturn as you expect your monthly savings habit will help dampen the effect of any falls and allow you to benefit from pound cost averaging. Your willingness to buy on the dips is a good thing.

If you already have a decent pension, rather than adding more to a pension, you may want to concentrate on investing in an Isa for now as it has more flexibility in terms of access. This could be especially useful if you want to use the money for your daughter's education and other big-ticket items – as well as for your retirement.  

Having a 100 per cent weighting to equities is fitting for your age, goals and attitude to risk. You don't need bonds or alternatives and, as you are a home-owner with a second rental property, there is no need to add a property fund as you already have more than enough allocated to this asset.

HOW TO IMPROVE THE PORTFOLIO

Andy Collinson says:

It is good to see that you are using fund research provided by many of the key research companies. But you still need to constantly monitor your funds and remember that just because a fund has a decent rating now it may not always be the case.

And before thinking about individual funds you should think about what percentage of your portfolio you invest in each of the various asset classes. As you are seeking outright growth and are prepared to accept a reasonable degree of risk along the way, I wouldn't expect to see gilts, corporate bonds or property funds accounting for much, if any, of your portfolio.

You should be able to get information on asset allocation from the fund research companies you consult, as many also provide guidance on this.

Adrian Lowcock says:

As you have only recently started investing don't be afraid of making mistakes, and be prepared for your views to be challenged. The biggest risk to any investment is usually the investor who owns it – investors can become overconfident about their ability or overly cautious if they suffer a loss.

One way to rein this in is to establish a simple but comprehensive asset allocation model. Decide how much you are going to hold in equities in the different geographic regions, and how much you want to invest in bonds and alternative assets such as property, commodities and absolute return funds.

Investors typically have most equity exposure to their domestic market as it is less risky for them and less exposed to currency fluctuations. If you do this, as the portfolio grows you may find that three or even four funds are suitable for your UK exposure. Whereas, for example, for your Japan exposure you will only need one fund. Your current UK equity exposure lacks diversification as you are getting all of it via one manager. I would swap Woodford Patient Capital Trust (WPCT) for a UK small- or micro-cap fund.

For the time being avoid thematic funds such as those focused on biotechnology, or country-specific ones such as Jupiter India (GB00BD08NQ14), which you could sell in favour of a broader global emerging markets fund. While the long-term potential of India is exciting, the region is not cheap and there are other countries and companies offering interesting opportunities. It is more important to construct a portfolio with a robust core that should help see you through a range of markets.

But you have a very high-risk aggressive growth fund with quite a short-term focus. The portfolio is 100 per cent in equities, so is potentially volatile. And in addition you have some potentially volatile funds in there. Although you say you are not concerned about volatility as long as you can get the return, one of the most important principles of investing is capital preservation.

For example, it is easier to grow your portfolio 150 per cent if you don't lose 50 per cent of the value in the first place, as you would then need 200 per cent growth. You should be able to leave a good portfolio largely untouched for a year or so with only minor changes. For example, when a good manager leaves the fund they are running or to rebalance the portfolio after a fund has performed well.

Reduce your equity allocation to around 60 per cent and invest some of your portfolio in gold, property, bonds and absolute-return funds.

Your US exposure is too high – this market is expensive and some tech funds are very expensive. So consider reducing this in favour of less expensive markets.

And I would not suggest Legg Mason IF Japan Equity (GB00B8JYLC77) for a relatively new investor as it is very high-risk, so swap it for a core Japan fund.

An example of a portfolio for an investor starting out could be as follows:

Darius McDermott says:

Your holdings in Woodford Patient Capital Trust and CF Woodford Equity Income should sufficiently meet your preference for active funds that invest in unquoted companies. 

Although you are just looking for strong growth from the portfolio, rather than deriving an income, it would be wrong to totally discount income-yielding funds. The reinvestment of dividends has been shown to be a major contributor to total returns, especially over long periods of time, so you could contemplate adding a dividend-producing fund to benefit from this compounding effect. I like JOHCM UK Dynamic (GB00BDZRJ101), a multi-cap growth fund that invests in quality dividend-paying stocks that are unloved and has a yield of 3.4 per cent, giving you the best of both worlds.

With such a growth bias, the portfolio may also benefit from a value strategy such as that offered by Man GLG Japan Core Alpha (GB00B0119B50) and Jupiter UK Special Situations (GB00B4KL9F89) funds.

You like compelling themes, so Polar Capital Biotechnology (IE00B42P0H75) is worth a look. 

Our favoured US equity fund is Fidelity American Special Situations (GB00B89ST706), which you might like to compare this with your current picks.