Dale, age 38, is self-employed and earns between £80,000 and £100,000 a year. His and his partner’s home is valued at £600,000 with a mortgage of £180,000. They also own a buy-to-let property valued at £85,000 with a mortgage of £50,000.
Sipp and Isa invested in funds and shares, gold, residential property, cryptocurrency, cash.
Retire at 60 on income of £30,000 a year, build up retirement fund of £600,000, downsize home and be mortgage free.
“I would like to retire at age 60,” says Dale. “I hope to have built up retirement savings worth £600,000 by that time, from which I would draw £30,000 – 5 per cent – a year.
“I am currently investing £7,000 into my self-invested personal pension (Sipp) and £15,000 into my individual savings account (Isa) per year. I have been investing for a year and would say that I have a medium- to high-risk appetite. I would be prepared for the value of my investments to fall by up to 15 to 20 per cent in any given year as I’m still young.
“I am thinking of next investing in BP (BP.), Auto Trader (AUTO), Glencore (GLEN), GYM (GYM), Informa (INF), Mondi (MNDI), Moneysupermarket.com (MONY), Prudential (PRU), Tesco (TSCO) and Trainline (TRN).
“In addition to my investments, I own one Bitcoin.
“My earnings in the near future could be closer to the lower end of the annual range I x get because of the Covid-19 situation. But we plan to sell our main home in five years’ time and buy a house with a value of between £350,000 and £400,000 – mortgage free.”
|Holding||Value (£)||% of the portfolio|
|JPMorgan Emerging Markets (GB00B1YX4S73)||1,000||0.86|
|Legal & General US Index Trust (GB00BG0QPL51)||3,700||3.2|
|Man GLG Japan CoreAlpha (GB00B0119B50)||1,000||0.86|
|Rathbone Global Opportunities (GB00BH0P2M97)||1,500||1.3|
|Threadneedle European (GB00B8C2LS47)||1,000||0.86|
|LF Lindsell Train UK Equity (GB00BJFLM156)||1,500||1.3|
|HSBC FTSE 250 Index Fund (GB00B80QG052)||1,000||0.86|
|iShares Emerging Markets Equity Index Fund (GB00BJL5BW59)||1,000||0.86|
|Legal & General European Index Trust (GB00BG0QP042)||1,000||0.86|
|Legal & General Global Technology Index Trust (GB00B0CNH163)||1,600||1.38|
|Legal & General International Index Trust (GB00BG0QP604)||2,000||1.73|
|LF Blue Whale Growth (GB00BD6PG563)||1,200||1.04|
|Fundsmith Equity (GB00B41YBW71)||1,500||1.3|
|Lindsell Train Global Equity (IE00BJSPMJ28)||1,500||1.3|
|Scottish Mortgage Investment Trust (SMT)||2,000||1.73|
|BlackRock Throgmorton Trust (THRG)||1,000||0.86|
|Renewables Infrastructure Group (TRIG)||1,500||1.3|
|Legal & General (LGEN)||1,600||1.38|
|Lloyds Banking (LLOY)||1,200||1.04|
|Melrose Industries (MRO)||1,500||1.3|
|Impact Healthcare Reit (IHR)||1,000||0.86|
|iShares Global Property Securities Equity Index Fund (GB00BPFJCF57)||800||0.69|
|Primary Health Properties (PHP)||1,500||1.3|
|Sirius Real Estate (SRE)||800||0.69|
|Tritax Big Box REIT (BBOX)||1,000||0.86|
|Buy-to-let property minus mortgage||35,000||30.25|
|5oz gold bullion||6,797||5.87|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.
|Fundsmith Equity top 10 holdings||Lindsell Train top 10 holdings (%)|
|Idexx||London Stock Exchange||7.02|
|Estée Lauder||Mondelez International||4.7|
|Source: Fundsmith as at 30 June 2020||Source: Lindsell Train as at 30 June 2020|
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
If you can save £22,000 a year and the amount you save rises with inflation, you will have much more than £600,000 by age 60, assuming average equity returns. This doesn’t necessarily mean that you should raise your expectations, or save less and live more expensively – not least because there is huge uncertainty about long-term returns. But it does mean that you might not need to take on lots of risk or chase high returns. Rather, just like a football team that is in the lead, you should focus on avoiding errors.
Watch the costs of actively managed funds as their fees compound horribly over time. You are holding ones with good performance records such as Fundsmith Equity (GB00B41YBW71) and Lindsell Train Global Equity (IE00BJSPMJ28). However, while a good performance record might mean that a fund’s managers have genuine skill, it can also indicate the strategy they’ve followed has almost played out. The managers of these two funds have, in part, succeeded by investing in monopoly-type stocks that were underpriced a few years ago. But such stocks might now be more fully priced, which could mean lower returns in future.
If equity returns are average in coming years – around 4 or 5 per cent a year in real terms – you will not need to beat the market. So why pay extra for the chance of doing this? And if returns fall short of average, there’s no assurance that funds will outperform, either.
Buying individual stocks requires a lot of work over the long term. Thanks to the work of Hendrik Bessembinder at Arizona State University, we know that most shares underperform cash over their lifetimes: they fall victim to creative destruction or bad management. This means that you need to constantly monitor your holdings and even then you risk some big losses. Professor Bessembinder has found that only a small minority of stocks deliver stellar long-term returns, and your chances of spotting these are small.
So if you want an easy buy-and-forget portfolio for the long term, you should hold tracker funds.
James Norrington, specialist writer at Investors Chronicle, says:
Your objectives look sensible, although you should factor in inflation when setting your target investment pot and the rate of return that you’ll need. Given the size of your starting sum, the amount you’re saving each year and the power of compounding, you won’t need an outlandish rate of investment return to have the equivalent of £600,000 in today’s money when you retire.
This is important, because it means that you do not need to take big risks with your portfolio. Investing in equities can be a bumpy ride as this year has reminded us. Central banks have so far come to the rescue with massive stimuli to buoy stock markets, but it is still important to diversify investment portfolios. Holding just direct share holdings or funds that invest in shares, means that your Isa and Sipp could fall more than your stated risk tolerance of a 15 to 20 per cent peak-to-trough reduction in one year.
The dilemma is where to find other assets offering inflation-beating returns that are negatively correlated with share prices. This is tricky because the price of quality government bonds is also in a massive bubble. Their yields, which change inversely with prices, are low and in many cases negative in real terms after inflation.
As you are self-employed and earn around £100,000 in a good year, you should consult with a tax adviser on which years you should invest more into your Sipp as opposed to your Isa. It may be the case that the tax relief on pension contributions could help you deploy your earned income more effectively.
Rachel Winter, associate investment director at Killik & Co, says:
If you continue to add £22,000 to your portfolio each year you should be able to meet your target of retiring at 60 with a pot worth £600,000 relatively easily. A 5 per cent average annual return from an equity portfolio is a realistic expectation, and if you achieve this then you should meet your objective early.
I would recommend seeking some advice on whether the amounts you are putting into your Isa and Sipp is optimal for you. Isas offer more flexibility in terms of withdrawals and you can take money out of them at any time, with the exception of Lifetime Isas. This ability to access your money could be beneficial if your earnings slow down more than expected as a result of the coronavirus.
It is not possible to access Sipps until you are age 55, however, contributing to a Sipp could be more tax-efficient for your company as pension contributions, in effect, would reduce its profits.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
Be careful with property funds. These carry the danger that they’ll be unable to sell their holdings quickly. This is not a problem if you are a genuine long-term investor, in fact, you could pick up a liquidity risk premium. But if you need to raise cash quickly, especially in bad times – maybe because your earnings fall in a recession – it could be a problem.
Make sure that your investments are not over-diversified. You already have 26 stocks and funds, and are thinking of adding more. But as you diversify you dilute performance. This limits your risk of underperforming the market, but also reduces your chances of outperforming it. So you end up with something much like a tracker fund, except with higher costs – fund fees, dealing charges and the cost of time spent researching stocks.
You must also diversify intelligently. For long-term investors, this means spreading your investments around the world. Although national stock markets rise and fall together in the short run, they can and do deviate a lot over longer periods. For example, in recent years the US has done especially well. But we’ve no reason to suppose this will remain the case in coming years. Tracker funds spread across major and emerging markets are the way to diversify.
James Norrington says:
There probably should be some bond exposure in your portfolio, although maybe not as much as in the balanced portfolios of years gone by. A well managed bond fund would be a good addition, which along with your property exposure and a larger than usual slug of cash should provide some diversification to help dilute the worst spells of stock market downside. Equities will help you achieve the 3 to 4 per cent annualised returns you’ll probably need.
Although having more cash than usual is probably a good policy in these uncertain times, if you’re comfortable with the £38,000 you currently have in this asset, it’s probably a good idea to invest most of the pension and Isa contributions you plan to make.
I think that you have too many holdings and most of the shares you are thinking of investing in only have lukewarm appeal for me. Don’t fall into the trap of thinking that you can pick up bargains on the basis that companies that did well in the past will recover former glories. The coronavirus crisis and how we build back from it will accelerate many of the trends that were structural headwinds.
I would drip money into funds with expert managers focused on capturing upside from secular themes wherever they can find the best companies. You already hold Scottish Mortgage Investment Trust (SMT), which has set the standard in growth investing in recent years, with smart bets on US tech. You should also beef up listed infrastructure, healthcare, biotechnology, artificial intelligence and renewable energy funds.
Look for funds with managers who buy into the businesses of tomorrow and trust their expertise. You can balance these targeted strategies with cheap tracker funds that give broad exposure to regional stock markets.
Rachel Winter says:
Virtually all the investments in your portfolio are equities or equity-based funds. This means that the Isa and Sipp are relatively high risk, and there is a real possibility of them losing more than 15 to 20 per cent in any given year. Although a pure equity portfolio is not unsuitable for someone your age with such a long investment time horizon, if a 15 to 20 per cent loss is not something you could bear consider lowering your risk level a little. You could do this by adding more non-equity assets such as corporate bond or infrastructure funds.
Overall, I think you have a good mix of active and passive funds with a global approach, and an emphasis on higher-growth sectors such as technology. However, consider how much you are investing in each fund in relation to how much you are investing in each of the individual equities in the accounts. For example, you have less invested in a FTSE 250 tracker fund, which contains 250 different stocks, than you have in each of the direct equity holdings.
You plan to focus more on direct equity holdings, in which case I would encourage a global approach rather than just sticking to the UK. Major stock exchanges across Europe and the US are easily accessible for UK investors, and a global approach would lower your risk level by increasing diversification. It would also enable you to maintain exposure to the technology sector, which is not particularly well represented on the UK market.