Andy is age 43, divorced, and has children aged eight and 13. His company pays him a salary of £40,000 and dividends of £20,000 per year, and puts £40,000 into his self-invested personal pension (Sipp) each year. His home is worth about £600,000 and he has a repayment mortgage on it of £240,000.
Sipp and Isa invested in funds, cash, residential property
Retire at age 65 on an income of £50,000, give two children £100,000 at age 21 to buy homes
"I want my investments to grow over the long term,” says Andy. “When I reach age 65 I will rebalance my investments away from a growth focus, and start to draw dividends and capital from them worth about £50,000 a year.
"I also hope to give each of my children £100,000 when they are around age 21 to use as a deposit to buy a home.
"I have been investing for 15 years and would say that my risk appetite is moderate to high, as I can tolerate volatility and the value of my investments varying over short-term periods. I will continue to invest at the same pace even with markets correcting, as I expect that the recovery will be fairly swift for certain types of assets, and take a few years rather than decades.
"I put £500 a month into 10 of my investments, so £60,000 a year using my annual pensions and individual savings account (Isa) allowances. I invest along the lines of themes including growth, technology and US equities.
"But I want to replace Scottish Mortgage Investment Trust (SMT) because I am worried it is too concentrated in a small number of investments. And I want to add some funds that are similar to Impax Environmental Markets (IEM)."
|Holding||Value (£)||% of the portfolio|
|Invesco EQQQ NASDAQ-100 UCITS ETF (EQQQ)||32,900||7.60|
|iShares S&P 500 Information Technology Sector UCITS ETF (IITU)||36,000||8.32|
|iShares MSCI EM SRI UCITS ETF (SUES)||25,080||5.80|
|JPMorgan Emerging Markets Investment Trust (JMG)||31,000||7.17|
|Monks Investment Trust (MNKS)||32,600||7.54|
|Scottish Mortgage Investment Trust (SMT)||33,045||7.64|
|Impax Environmental Markets (IEM)||41,070||9.49|
|TR Property Investment Trust (TRY)||38,430||8.88|
|Worldwide Healthcare Trust (WWH)||36,000||8.32|
|Capital Gearing Trust (CGT)||29,867||6.90|
|Smithson Investment Trust (SSON)||34,870||8.06|
|Fundsmith Equity (GB00B4Q5X527)||41,780||9.66|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
You have some quite risky holdings. Invesco EQQQ NASDAQ-100 UCITS ETF (EQQQ) and iShares S&P 500 Information Technology Sector UCITS ETF (IITU) are very sensitive to investor sentiment, so would fall more than many stocks if sentiment turns bearish. Your emerging markets funds are [highly volatile] and these regions often underperform developed markets in a global downturn. And Smithson Investment Trust (SSON) invests in smaller companies, so incurs more cyclical risk than many other funds.
Such exposure might be a good thing now that the market is depressed. Such funds should, on average, offer investors compensation for taking on extra risk over the long run. If or when global equities recover, you might benefit from this risk premium.
This is a justification for holding these investments rather than that they might generate growth. Over time, there is no correlation between economic growth and equity returns. For example, over the past 10 years Chinese equities have underperformed Danish and Dutch equities. A key reason for this is that expected growth is often discounted in advance. If emerging markets do well it is as a reward for taking risk, rather than because they are good growth investments.
You have some counterweights to these risky positions, most obviously via Capital Gearing Trust (CGT). But Monks Investment Trust (MNKS) invests in big monopoly stocks such as Amazon (US:AMZN), Alphabet (US:GOOGL) and Microsoft (US:MSFT), which tend to be more defensive than most.
And you can manage the risk of your portfolio yourself by taking a few relatively simple steps. [See the IC of 2 April for more on this in Simplicity works.]
Petronella West, chief executive officer, and George Steger, senior wealth manager at Investment Quorum, say:
Your retirement income needs seem achievable based on your current saving rate. Assuming conservative returns in line with inflation until your retirement, you could achieve a yield and/or withdrawal rate of around 3.2 per cent a year. A total return approach to income in retirement, whereby you draw capital as well as dividends, is more sensible than just chasing high-yielding investments.
Although your intended retirement is a long time away as the time approaches consider increasing your cash reserves.
Consider funding junior Isas as a way of making gifts to your children. If you invested £9,000 each per year into one of these you would reduce the risk of potential inheritance tax relative to gifting them a larger lump sum.
Rebecca Williams, client director at Brown Shipley, says:
Due to the impact that extreme short-term volatility is having on investment portfolios it is important to remember your long-term objectives and strategy. Having an overall wealth plan that brings all of your goals together helps you focus on what can be achieved now and what you need to plan for.
Your needs and objectives could be addressed by a cash-flow plan and modelling different scenarios. Although these are typically put together by wealth planners, you could be involved in building and modifying the plan. It is important to review cash-flow plans regularly, particularly when your personal circumstances change.
An effective first step in creating a wealth plan to life is to have a lifetime cash-flow plan. This should allow you to view your assets, liabilities, income and expenditure together like a personal balance sheet. It takes into account your current position and the achievability of future goals, and considers sustainability of income, capacity for saving, personal tax efficiency, affordability of gifts, and impact of investment returns and market volatility.
One of your goals is to gift your children £100,000 each when they are age 21. As they are aged eight and 13 you have time to plan for this. A cash-flow plan could help you assess the affordability of making gifts of this size, how you might finance them and what the impact of making them will be on your longer-term retirement planning.
Do you plan to sell your business when you retire and would doing this generate additional funds for your retirement? Or might one of your children take it over, meaning that you’ll be involved with it for several years longer and draw a reduced income from it?
It’s good that your business can make the maximum tax-efficient pension contribution for you as this will add up to a significant amount over time.
A cash-flow plan would enable you to estimate what your existing pension fund, together with projected future contributions, growth rates and charges, to determine how achievable an income of £50,000 a year from age 65 is. It could also model different scenarios that show what the impact of a business sale or phased retirement over several years are.
This is important because many people underestimate their life expectancy. For example, a man aged 43 today will, on average, live until age 84. However, there is also a one-in-four chance of living until 93 and a one-in-10 chance of living until 98, according to the Office for National Statistics Life expectancy calculator. A cash-flow plan can stress test the sustainability of your income during retirement.
The state pension will provide part of the income you need in retirement. You’re likely to start receiving it at age 67, two years after you plan to start drawing from your investments, and by then you may not be able to start drawing it until an even higher age. So it is likely that you will need to draw more from your investments in the early years of retirement.
If you don’t know what amount of state pension you are likely to receive you can get a forecast at https://www.gov.uk/government/publications/application-for-a-state-pension-statement. This will give you information about the amount of state pension you’ll receive, and help you consider how to address any gaps in your National Insurance record, if necessary.
As an immediate priority, I’d suggest reviewing your cash reserves and levels of protection. Normally, we suggest that clients maintain an accessible cash emergency fund equal to at least three months of their expenditure. You hold cash worth £20,000, but review this because your business could be negatively affected by the current economic environment, meaning that you cannot draw a salary and dividends at the level you currently do.
Consider taking out insurance to protect you and your business if you are unable to work due to illness. There are two complementary types of personal cover. Critical illness provides a lump sum if you are diagnosed with a serious illness, and income protection provides a regular payment to replace income if you are ill and unable work for a period of time.
You should have key person insurance to cover your business against financial loss if you die or are seriously ill. The policy is paid for by and any payout is made to the business – rather than you.
Also consider life assurance that provides a capital sum in the event of your death. This could, for example, repay your mortgage and leave a legacy to your children, maybe to assist with education costs or purchasing a first home.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
You are thinking of selling Scottish Mortgage Investment Trust because it is highly concentrated, but many investors would regard this as a good thing. If a manager expects a stock to do well, why shouldn’t he or she buy a lot of it? And why dilute the fund's performance by holding other stocks? Most fund managers have only a handful of good ideas, not through lack of ability but because markets are fairly efficient, so it can be difficult to find genuinely underpriced shares. Therefore more holdings can mean worse performance.
If you think that Scottish Mortgage Investment Trust's concentration is a risk do what you are already doing – diversify that risk by holding other funds.
You should also distinguish between stockpickers and risk managers. Scottish Mortgage Investment Trust's managers, James Anderson and Tom Slater, are the former. So what you need to consider is whether they are good stickpickers, and their track record suggests that they are. But so did Neil Woodford’s. A good track record is ambiguous: it can be evidence of stockpicking ability or a warning that the fund’s holdings have become overpriced.
It’s this issue that should determine whether you sell Scottish Mortgage Investment Trust rather than its risk level. What matters is your portfolio as a whole: if an individual component appears risky, you can dilute that risk with other holdings.
You want more investments like Impax Environmental Markets. The few closed-end funds with a similar focus include Jupiter Green Investment Trust (JGC), but there is a much wider choice of open-ended funds with such a focus.
However, why do you want more of these? Green funds are likely to move together, driven by waves of sentiment towards the sector and market risk. If you hold several of them you are only diversifying manager risk – the danger that the managers of one of them will make poor stock picks – but this is only a small element of these types of funds' risks.
Petronella West and George Steger say:
You have put together a portfolio that should have delivered decent returns until the recent correction. The heavy allocation to equities, and the themes to which you have exposure – technology, the US and growth – should not have done you any harm over the long term. And your timeframe and risk profile justify such an approach.
Although the recent market sell-off has hit the US stock market as a whole, technology and quality growth shares have held up relatively well. Your funds' largest holdings include Amazon, Microsoft and Tencent (700:HKG), which express your investment themes and are dominant companies that could come out of the current crisis in better shape than their competitors.
If you want exposure to a technology theme that is relevant at the moment, consider First Trust Cloud Computing UCITS ETF (FSKY). This provides exposure to digital infrastructure, as the ETF aims to track the performance of cloud computing companies, as defined by the Consumer Technology Association, a trade body that represents the US consumer technology industry.
Due to your longer-term investment horizon, you could gradually increase your Asia exposure to potentially benefit from the region’s wealth expansion via a fund such as Baillie Gifford Pacific (GB0006063233).
TR Property Investment Trust (TRY) has performed well, but the property sector could come under increased pressure over the longer term. And many employees are working from home at the moment, which shows how businesses and educational institutions can operate remotely – perhaps better than people thought they would be able to. So institutions may look to manage costs by reducing the amount of office space they take, which would cut demand for this [type of commercial property]. But on the flipside, funds such as First Trust Cloud Computing UCITS ETF could benefit from [more home working and the increase in demand for the necessary IT].
You have exposure to environmental, social and governance (ESG) investing via Impax Environmental Markets and iShares MSCI EM SRI UCITS ETF. Whether you add more investments that take this approach depends on whether you want wider exposure to different aspects of it or just to have a certain proportion of your investments benefit from the momentum of this area, which is unlikely to dissipate.