Maximise your workplace pension

"I am aiming for a 7 per cent a year total return – 5 per cent plus inflation," says Connor. "I will reinvest any income I get for 10 to 15 years. Then I will aim for a 5 per cent total return a year, approximately 3-5 per cent of which comes as income that I will use to top up my salary for 15 to 20 years. This will be to help support a family, if I have one.

"I then hope to achieve a 7 per cent a year total return, most of which will come from income with lower growth of around 1 per cent over inflation.

"I have been saving £250 every month since January 2017. Before that, I had accumulated £1,300 in pensions, which I transferred into a self-invested personal pension (Sipp) that I manage myself and which is invested in funds. I hold my direct shareholdings in an individual savings account (Isa).

I have no overdraft or credit card debt, but I do have a student loan of over £25,000. It has an interest rate of 1.25 per cent and I make repayments of £90 a month.

"Each month, I also spend £700 on rent, £150 on travel, and another £150 on expenses such as phone bills, insurance and gym membership.

"Most people my age who manage to set aside savings have a short- to medium-term goal, for example an emergency fund, holidays, a home or a car. So their typical time horizon is around five years. But my savings are to start supporting me in around 15 years' time and into retirement, so I aim for my investment strategy to reflect that.

"I buy and hold my investments, and I would only sell one if I thought it was overvalued or there was a shift in sentiment towards it. I add new investments if I believe their price is below their value, as with recent addition WPP (WPP). So I consider myself a value investor.

"I believe that more people will be driving electric cars in future so hold National Grid (NG.) as it should benefit from this increase in demand, and Johnson Matthey (JMAT) because it has a monopoly on car battery technology. 

"I am happy to take on higher risk to try to achieve a higher return in the long run. I have used any falls in the investments I own to increase my holding in them.

Connor'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:

It's fantastic that you've started investing young because you will benefit from the power of compounding. Simple maths tells us how powerful this can be. If you invest £1,000 a year for 30 years with an annual return of 5 per cent, you'll end up with over £66,000. If you save for 25 years you'll end up with less than £48,000. Just an extra five years of investing could produce a return of £13,000 on £5,000 invested.

There is, however, a problem with your strategy. Buying and holding particular stocks is a dangerous strategy for the long term because even apparently strong companies can go under if they are on the wrong side of creative destruction. 

And this isn't necessarily because they are badly managed. It can happen because technical change removes what was thought to be their monopoly. You say that Johnson Matthey has a monopoly on car battery technology. But Polaroid once had a monopoly on instant photography technology. That was useless when digital cameras came along. Xerox (XRX:NYQ) had a near-monopoly on photocopying, but that was destroyed by email. And Nokia (NOK1V:HEX) had a strong position in mobile phones until the smartphone came along. 

Monopolies are there to be destroyed. Innovators' descriptions of themselves as disruptors is often irritating hype. But it captures a big truth – that innovations disrupt existing businesses and even kill them.

This is especially awkward because, historically, new innovations have often been embodied by new companies, which means that incumbents can be grossly devalued by technical progress. Boyan Jovanovich, professor of economics at New York University, and his colleagues have shown that part of the reason why stock markets fell in the 1970s was because investors feared that the IT revolution would devalue existing quoted companies while benefiting ones that were yet to list on the market.

And the destruction of monopolies doesn't only have to come from new entrants – it can also come from governments. You say National Grid will benefit from increased use of electric cars, but what if a Labour government nationalises it first?

Tamsin Hazell, chartered financial planner at Succession Group, says:

While getting your underlying investment strategy right is very important, it is also crucial to optimise the tax efficiency of your financial arrangements to prevent unnecessary tax drag on returns. So I suggest first and foremost focusing on your investment tax wrappers.

Your current ongoing financial commitments are relatively low, so now is a great time to save as much as you can comfortably afford, as the effect of compounded returns should really benefit you in the long run.

It is worth contributing to a workplace pension to benefit from your employer's maximum contribution. As a basic-rate taxpayer, the amount you pay into a pension benefits from 20 per cent income tax relief. So, for every £80 you contribute £100 is invested. Also check if your employer offers salary sacrifice as this would give your pension a further uplift via a saving on National Insurance. However, care should be taken when sacrificing salary if you are intending to apply for a mortgage in the near future.

Holding a stocks-and-shares Isa alongside your pension is a sensible option as all returns are tax-free. But if you are aged between 18 and 40 you can open a Lifetime Isa, into which you can contribute up to £4,000 a year and receive a 25 per cent bonus from the government. So for every £4,000 you put in £5,000 will be invested. The money can either be accessed to purchase your first home, or from age 60, so could help fund your retirement.

James Norrington, specialist writer at Investors Chronicle, says:

 At age 25 time is your friend, especially if you reinvest the dividends as the compounding returns should give you the best chance of achieving a sizeable retirement pot.

If your employer offers a defined-contribution scheme, you should pay in as much as is necessary to get its maximum contribution. If you have opted out of your company pension scheme and are saving into a Sipp instead you may be turning down free money. And a defined-contribution scheme would invest in a broader and more diversified selection of collective funds than your portfolio, which over time could offer steadier and less volatile returns.

You are some way short of maxing out your annual pensions allowance, as it is possible to make contributions, that don't exceed your net relevant earnings in the tax year that you pay them, of up to £40,000 a year. And you are far short of the lifetime pension allowance, which rises to £1.03m in April.

However, you have a good job and as you get older you may become a very high earner. If you were to earn over £100,000, as things stand you would have your annual income tax allowance tapered. One of the ways to prevent this loss is to sacrifice more of your salary as a net pension contribution, because the government will deduct this amount from your gross salary when calculating your income tax band. In effect, your pension contributions cost you less than their value.

You will hopefully achieve significant compound returns in your pension and you might want to use up the full annual allowance, including substantial employer contributions, in later life. So breaching the lifetime allowance as you approach retirement age could be a risk and there are tax penalties for exceeding it.

So if you pay as much as is necessary into your workplace pension to get your employer's maximum contribution, your second port of call should be a Lifetime Isa rather than a Sipp. This would leave more of your lifetime pension allowance free for when you are in your highest earning/higher employer contribution years.

The other reason to consider a lifetime Isa is the money from the government, which will put in 25 per cent of what you put in every year, up to a limit of £1,000, until you are age 50. At your age that's potentially up to £25,000 for doing nothing. There is also flexibility as you could decide to use money to buy a first home if, for example, you meet a partner and home ownership becomes more of an immediate priority.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

It is very dangerous to bet on particular companies benefiting from future technical change. But there are two strategies you could adopt to address this. 

One is to use renowned US investor Warren Buffett's approach. Look for companies with economic moats – things that allow them to fend off rivals. Does, for example, Johnson Matthey really have the power to fight off competition from future technologies? Monopoly power alone is not good enough – the monopoly has to be sustained. It's far harder to find companies with this, which is why Buffett spends so much time researching and so little time trading.

Or back the field rather than particular horses. I know tracker funds are dull, but they diversify the risk of stocks that end up losing from technical change. But in this context trackers are insufficient. It's very possible that a lot of future growth will come from companies that aren't yet listed on the stock market. So there is a case for long-term investors buying into private equity, which you can do via investment trusts.

Tamsin Hazell says:

At 25 years old your adventurous approach towards investment risk seems entirely appropriate. Your long-term investment horizon gives you scope to ride out the ups and downs of investments' returns. So I would suggest an investor of your risk profile holds a blend of 20 per cent fixed-interest securities and 80 per cent equities.

Ideally, your equity allocation should be well diversified across sectors and geographic regions. You obviously enjoy stock selection, so it may be worth ring-fencing a small account for this purpose, while using funds run by experienced managers for the bulk of your investments. You can then compare and contrast performance.

It is always important to have enough cash in an instant-access account to use as a contingency fund if necessary. This will prevent you from being forced to draw on your invested funds at a lower value than you would like.

James Norrington says:

At your age it's reasonable to have the lion's share of your investments in equities. Nine per cent of your portfolio is allocated to high-yield bonds via City Merchants High Yield Trust (CMHY), but a textbook portfolio would also include other assets such as quality government bonds, property and cash.

If you were a homeowner, had a company pension and some cash set aside for emergencies, along with your human capital – your ability to earn through work or potentially marry money – even with a 90 per cent equities portfolio as a young person you'd still be well diversified.

But pay more careful attention to the diversification of your equity allocation. With a small starting sum, you're better off investing in funds rather than individual shares. A lot of people will tell you the starting point for a small equity allocation should be a global tracker fund. This would certainly be a cheap way to invest, but as these funds are typically based on the biggest markets and stocks by market capitalisation, you would have over 50 per cent of your equity allocation in US mega-caps. And these are on stretched valuation multiples therefore not priced to give a good forward rate of return.

Another option, which is more expensive but cheaper than holding individual shares, is to hold a few funds that give exposure to a variety of broad global themes and markets. You already have Woodford Patient Capital Trust (WPCT), which invests in themes such as biotech and internet developments. And Fundsmith Emerging Equities Trust (FEET) takes a thematic approach to emerging markets, focusing on stocks with exposure to development themes such as food and the expanding middle class in places such as India.

HICL Infrastructure Company (HICL) has some fixed-income-style attributes, but is very UK-centric and there is a risk that many of HICL's investments could be nationalised if Labour wins the next election. Listed infrastructure is certainly an equity sub-class that is worth considering for steady, lower-volatility returns, but you should think about more international funds.

Broader developed markets should account for most of your equity allocation. A good way to get this exposure would be investment trusts or open-ended funds, and we include a number with reasonable charges in our IC Top 100 Funds. Alternatively, you could use passive funds such as exchange traded funds (ETFs) to track developed markets you think are attractive. But have different weightings to these regions to those that of a global tracker fund.

If you don't have enough capital for larger holdings, buying individual shares is an expensive way to concentrate risk. You say you like value stocks, but there is always the danger that some companies are cheap for a reason and end up being value traps. For example, I don't like WPP. This is a company in an industry that is constantly being disrupted by the onward march of technology, so even if you think it seems undervalued, its future cash flows could be much lower than you think.