Don't invest too much with one manager

“I’d like to retire at around age 60 or, ideally, at 55, so I could give up the rat race and do something different,” says Adam. “I think that my wife and I will need about £40,000 a year to live off in retirement. By then, our business should incur fewer costs, so we could maybe earn £5,000 a year from that. So we will need our pensions and investments to generate about £35,000 a year.

"I have a workplace pension currently worth £70,000. I put 7 per cent of my salary into it and this is matched by my employer. I also have a self-invested personal pension (Sipp) worth around £37,000 and an investment individual savings account (Isa) worth £88,000.

"My wife doesn’t have any pension. But she plans to return to work soon in a job that pays a salary of about £40,000 a year. However, she will not earn this in full for the next two years as she plans only to work three days a week until both kids are at school.

"We have a savings account with about £40,000 in it, but plan to use the money for an extension on our house next year.

"So I’d like my investments to grow 7 per cent a year, on average, until I retire, and for my pensions and Isa to hit a value of £1m by the time I’m age 65.

"I’d say that I have a medium risk appetite because I’ve worked too hard to lose the money.

"I tend only to invest in funds as I've made better returns with these than direct equity holdings. I have recently invested £7,000 in HL Select UK Growth Shares (GB00BD5M6140) and £4,750 in LF Blue Whale Growth (GB00BD6PG563). But I disposed of a £7,000 holding in Stewart Investors Asia Pacific Leaders (GB0033874768).

"I don’t know if my current holdings are a good spread or if I should add some alternative investments. In the past I’ve dabbled in all sorts of assets, including gold, currency options, diamonds and direct equity holdings, including penny shares. But I found all these too risky.

"I’ve also had buy-to-let properties, but these involved too much work."

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

Growth of 7 per cent a year is not impossible, for example UK equities now yield almost 5 per cent. So if dividends grow in real terms by a little more than 2 per cent, and the yield stays where it is, you could get such a total return – albeit mostly due to reinvesting dividends.

But we might not get such dividend growth. Even before the pandemic, western economies were stagnant, and the pandemic might reinforce this. Also, the yield might shift permanently higher to reflect slower growth and greater risks. Two of the deepest recessions on record have occurred in the past 12 years and this might have a permanent scarring effect on investors’ appetite for risk.

So if you want rapid growth you will have to save a lot. You could quit the rat race, but only if you live frugally.

You’re right to avoid buy-to-let investing. This works for investors who can spot underpriced properties, have the time and skills to manage properties, and can cope with the risk of voids or being unable to sell the properties quickly because, for example, they have lots of cash. If you are not one of these people, steer clear of buy-to-let property.

Jason Hollands, managing director at Tilney, says:

You would like to retire by age 60 with a £1m retirement pot held in pensions and an Isa. But although £1m sounds like an enormous sum today, this amount wouldn’t create a lavish retirement.

Yields are currently extremely low and could rise from here. But it is important to factor in the impact of inflation over your timeframe, as this means it is likely that by the time you are age 60 £1m will be a lot less in real terms than it is today.

A 6 per cent average compounded annual return from the £195,000 you have invested in your pensions and Isa would get you halfway to your goal of retirement savings worth £1m by the time you are 60. To reach a £1m target, you need to invest at a rate of approximately £1,500 a month. And the more you can invest earlier on, the greater the chance you will have of reaching and hopefully exceeding your target.

In recent years you have invested in funds, having previously dabbled in more esoteric assets. The approach you are taking now is sensible and less risky. And as you have a well-paid job and businesses, delegating investment decisions to a select number of fund managers is probably a better use of your time.

But it is still important to choose your investments carefully and I’m sorry to see that you hold Neil Woodford's former fund, LF Equity Income (GB00BLRZQC88), which has been a disaster. It really is important to look beyond the hype around a fund manager and carefully examine the approach they are taking with their funds.

Ben Yearsley, director at Shore Financial Planning, says:

You have a decent amount of assets with around £900,000 of housing equity and a decent income. But you do not have that much in pensions, Isas and savings.

You want to grow the value of your pensions and Isa to about £1m in 21 years' time from a starting base of £195,000.

It is good that you and your employer are investing 7 per cent of your salary into your pension each year – £195,000 compounding at 7 per cent a year for 21 years would take your Isa and pension pot to a value of £807,000 by the time you are age 65. But this doesn’t take account of inflation and ignores future contributions. If you knock off, say, 1.5 per cent for inflation then that brings the real value down to £600,000 in today's money.

So you need to make more contributions to reach a value of £1m in today's money, and probably aim for £1.25m. Even if inflation was only at, say 1.5 per cent, it would rapidly eat into your future buying power.

Also factor in the amount of income you could normally take each year without having to chase income – 3 per cent is a comfortable figure, but this also suggests aiming for a slightly bigger pot than you have in mind, of £1.25m.

That said, as your wife is going to start working again she should also be able to make pension contributions.

Your say you have a medium risk appetite but don’t want to lose money. This is a common desire among investors, especially at the moment. But as you have a long investment time horizon equity investments seem like a good option.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You have 40 per cent of your Sipp and Isa in one fund – Fundsmith Equity (GB00B41YBW71). So you are betting that its good historic returns will continue. But as investors in Neil Woodford's former fund, LF Equity Income, know too well, it’s risky to bet on past performance persisting. There is not just the risk that Fundsmith Equity's manager, Terry Smith, will lose his touch. His success is partly due to having invested in quality, monopoly-type stocks, and he benefited from investors underpricing these a few years ago. But they have since corrected this error and if these types of stocks are now more fairly priced, future returns on this segment of the market will be lower. So you might want to diversify this risk.

Pay attention to the changes on active funds. Even quite small charges compound horribly over time. For example, half a percentage point of unnecessary fees could easily cost you over £2,000 for a £10,000 investment over 20 years. And you can achieve a lot with tracker funds and active funds with lower charges. Think very carefully about whether a fund manager’s stock picking skills justify higher fees.

Also consider private equity investment trusts. It’s possible that a lot of future growth will come from companies that aren’t yet listed, and private equity gives you exposure to these. But you don't need to rush into these, because unquoted companies are smaller and, in some cases, more highly geared [indebted] so are even more risky right now. But it’s something to explore at a later date.

You are right to avoid fads. Penny shares and currency options, for example, are only good ideas if you want to lose money. Gold, however, does have a small role to play in many portfolios. Its price tends to rise when interest rates fall, so it offers some insurance against risks such as recession or fears of worse stagnation.

Jason Hollands says:

You describe yourself as a medium risk investor, but your Isa and Sipp are relatively high risk as they are wholly invested in equities. And about half of them are invested in US equities. You hold Threadneedle American (GB00B7T2FK07), and about two-thirds of Fundsmith Equity's and 72 per cent of LF Blue Whale Growth's assets are in US equities. The latter fund has performed well, but that’s because it has quite extreme positioning, with 62 per cent of its assets in technology stocks. Threadneedle American is also overweight tech, with about 30 per cent of its assets in this sector. That part of the market has been a very hot area, but those stocks are now trading at very expensive valuations, so trimming back a little and taking profits might be wise.

I’m a huge fan of Fundsmith Equity, but 40 per cent of your Isa and Sipp are in that fund and I think it's important not to have too much invested with a single manager. There are other strong global funds that invest in quality growth companies, such as TB Evenlode Global Income (GB00BF1QMV61), Lindsell Train Global Equity (IE00BJSPMJ28) or GuardCap Global Equity (IE00BVSS1C10). So consider trimming Fundsmith Equity a little and reallocating to some other funds. 

You do not have exposure to Japan and emerging markets and, for a sterling-based investor, are at the lower end of exposure to UK equities. Funds for exposure to these areas include Baillie Gifford Japanese (GB0006011133) and Fidelity Emerging Markets (GB00B9SMK778). Liontrust Special Situations (GB00BG0J2688), meanwhile, invests across companies of all sizes so could serve as a core UK holding.

Ben Yearsley says:

Your investments are growth-focused with, for example, a substantial allocation to Fundsmith Equity and holdings in LF Blue Whale Growth and HL Select Global Growth Shares (GB00BJFVF381).

I have no issue with any of your holdings, but rather your investments' lack of diversification. As you have a 20-year investment time horizon I would put a big chunk of your investments in Asia. This region is still growing faster than most of the world with more favourable demographics and lower debt. First State Asia Focus (GB00BWNGXJ86) is a good core holding in this area and a spicier option for longer-term investors could be Matthews China Small Companies (LU0721876877). Maybe look at investing your monthly pension contributions in spicier areas.

You hold ASI UK Smaller Companies (GB00BBX46183) but could do with some more exposure to smaller and mid-sized companies, as these should provide better long-term growth. Options include Edinburgh Worldwide Investment Trust (EWI), managed by Baillie Gifford, or recently launched Aberdeen Standard SICAV I Global Mid-Cap Equity (LU2153592634), co-managed by smaller companies veteran Harry Nimmo and Anjli Shah.

I also think exposure to Japan, where some of the cheapest and best capitalised companies are, would be a good idea. You could do this via Baillie Gifford Japanese Fund or Baillie Gifford Japan Trust (BGFD).

I also suggest investing in infrastructure via First State Global Listed Infrastructure (GB00B24HJL45), one of my favoured long-term holdings, and a fund with a value investment style such as Schroder Global Recovery (GB00BYRJXP30).

The aim of adding these would be to diversify your portfolio. Take some profits from Fundsmith Equity and reinvest them in these funds.