Setting the right strategy for buying a home

"My parents have been investing for a number of years with some success, and are financially independent," says George. "They have also been investing surplus income into an individual savings account (Isa) over the past six years for me, and more recently into a self-invested personal pension (Sipp) and lifetime Isa (Lisa) via Hargreaves Lansdown.

"They – and I – now think it's time for me to be more directly involved in planning for my financial future. The plan is to use my Isa and Lisa for a house deposit, and to continue regular contributions into my Lisa and Sipp with my parents' support. The Sipp is for the very long term."

George'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

Chris Dillow, Investors Chronicle's economist, says:

You are doing the best thing an investor can possibly do – starting young. Doing so means you’ll benefit from the power of compounding. A simple example tells us how much this matters. If you invest for 30 years with a real return of 4 per cent a year each £1,000 will grow to £3,243. If you only invest for 25 years, your £1,000 will grow to just £2,666. Investing for five years longer thus gives you an extra £577 return on a £1,000 investment.

There’s something else I like – that you’re splitting your money between Isas and a Sipp. Doing so takes advantage of tax shelters. This matters especially for a young person as tax savings compound too: each pound you keep earns a compounded return. And while you intend to use your Isa for a deposit on a house, it’s wise to have some savings outside a pension not only for 'rainy day' money, but also as protection against any future restrictions on pension savings.

Martin Bamford, managing director of Informed Choice, says:

You are off to a great financial start in life thanks to the generosity of your parents. With £85,000 already in your Isa and Lisa you should be able to get on to the property ladder quickly, putting down a hefty deposit to reduce the amount you need to borrow.

But I would encourage you to minimise your mortgage debts and not overstretch when buying a first home, as it might be tempting to treat the deposit as a way to buy a more expensive property. Doing this could leave you financially exposed if interest rates rise, and would also mean higher costs in terms of things such as repairs, council tax and utility bills.

As well as your property purchase, you need to think about your student debts. These are better viewed as a graduate tax that applies to earnings exceeding £21,000. Student loans are usually written off after 30 years, so depending on your future earnings potential, you might be better off leaving it in place until that happens.

Ben Yearsley, director at Shore Financial Planning, says:

You are in a lucky position in that you have finished university, started your career and have money invested for your future. The best thing about your situation is that you seem to have your head screwed on correctly, and don't want to go and blow the investments on fast cars and living the high life – like some people your age might.

Your parents have been very sensible with how and where you have invested the money. They have taken advantage of long-term pension planning and the upfront tax relief that comes with it. And they have also been smart enough to realise that in the not too distant future you will want to purchase property and so have been investing in an Isa and Lisa too. The Lisa is a no brainer for those under 40 who haven't bought their first house yet – a nice government bonus alongside a fair degree of flexibility.

You should consider your Isa and Lisa separately to your Sipp for the very simple reason that you can't access the Sipp for over 30 years, whereas you want to use the Isa money much sooner to fund a house purchase.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Most of your Isa is in two expensive multi-manager funds: their fees are comfortably a percentage point more than you need to pay on tracker funds. This might not sound much, but it adds up horribly over time. Over 30 years, it could easily cost you over £800 for every £1,000 you invest.

How likely is it that these funds will beat the market sufficiently to compensate you for those extra charges? It’s not impossible. Income stocks – and therefore income funds – should outperform over the long run. This is partly because some higher-yielding stocks are relatively defensive and such stocks do well over time, and partly because other high-yielders carry cyclical risk, which should pay off on average.

I suspect, though, that it’s a close call. Personally, I wouldn’t have such funds as the core of my portfolio. Instead, I’d go for low-cost global trackers.

One reason for this is that over the long term the market will probably outlive most fund managers and even most companies. Backing the field rather than any particular horse is the least risky bet.

Also, for younger investors there is the risk that the UK economy will underperform others over the long run. This poses the danger that you’ll suffer not just poor job prospects, but also poor returns on UK-oriented stocks. Investing overseas helps spread this risk; it means you’re not putting all your eggs in the basket that is the UK.

It’s for this reason also that you are wise to hold emerging markets. These help spread the risk of ongoing secular stagnation – that of weak growth and hence equity returns across all western economies.

Martin Bamford says:

Your portfolios seem weighted to higher-risk investments with an equity bias. The Lisa is better diversified with the bond and total return funds, but otherwise you have risk assets which could fluctuate quite wildly in value during a period of stock market volatility.

Before deciding on a suitable asset allocation, you need to make some decisions on the timing of the property purchase and how much of your money will be allocated for this purpose. If your time horizon is anything less than five years I would recommend moving that balance into cash now. This would mean missing out on further potential investment returns, but would at least protect its value from market volatility and give you a clear figure to work with.

The balance of the portfolios and the Sipp could follow a riskier investment strategy aligned to longer-term goals. Keep things simple within your portfolios and take a long-term view when making investment decisions, which should be aligned to your personal financial goals rather than chasing market returns. You are starting from a very strong financial position, which has been built up through hard work and regular saving.

HL Multi-Manager Special Situations Trust (GB0030281066) and HL Multi-Manager Income & Growth Trust (GB0032033127) account for more than half of your investments. The performance of these funds looks fairly average relative to their respective sectors and you are paying for an extra layer of fund management. As you start to take more of an interest in this portfolio, I would suggest moving to low-cost index trackers covering the various asset types, reducing the overall costs of the portfolio and keeping more of the returns for yourself.

Ben Yearsley says:

If you are investing in a Sipp in your 20s, 30s or even 40s why wouldn't you take as much risk as possible? Your time horizon is so long you want higher-risk equities to form the bulk of the portfolio. In my view this means large exposure to smaller companies, Asia and emerging markets. I'm not saying you should put all of your Sipp into these areas, but definitely a high percentage of it.

At present I think you have an excellent mix of long-term high-growth areas, but I don't see the point of having HL Multi-Manager Special Situations Trust in the Sipp. And you already hold also some of this fund of fund's underlying holdings – Stewart Investors Asia Pacific Leaders (GB0033874768), Lindsell Train Global Equity (IE00BJSPMJ28) and Marlborough UK Micro Cap Growth (GB00B8F8YX59) – so you are essentially doubling up your exposure to these funds.

You can use a fund of funds as a core holding, however what is the point of it if you hold the underlying funds too? You would be better off selling HL Multi-Manager Special Situations Trust and reinvesting the proceeds across your other holdings.

You have a similar situation with your Isa, where by holding funds of funds alongside directly investing funds you are again doubling up on some of your exposure.

You also need to consider when you are going to make a house purchase, and how much of your Isa and Lisa you are going to use to buy it. I assume you will probably use it all as you will want as big a deposit as possible.

The key question here is timing, though. If you think that you won't make the house purchase for six years or more then the asset allocation is broadly fine, other than the funds of funds. But if you are thinking of buying a house in the next couple of years then the risk profile of your Isa and Lisa is wrong as you have too much market risk.

If you are thinking of buying in the next couple of years then you could invest the Isa and Lisa in cash, although current rates on offer are not very appealing. Or invest them in funds that aim to protect capital. Pyrford Global Total Return (IE00BZ0CQJ19), which you already hold, is a good option, as well as Artemis Strategic Assets (GB00B3VDD431), Invesco Perpetual Global Targeted Returns (GB00BJ04HL49) and Personal Assets Trust (PNL).