How do we choose between the many funds on offer?

Daljit is 30 and his wife is 29, and they have a combined annual income of £150,000. Their home is worth £500,000 and has a mortgage of £400,000.

They have a buy-to-let property worth £275,000 with an interest-only mortgage of £200,000, which provides rental income of £12,000 a year. They also have a buy-to-let property worth £190,000 with an interest-only mortgage of £123,000, which provides rental income of £8,000 a year.

“We would like to buy a new home worth around £1.5m in the next 10 years,” says Daljit. “We don't have kids but, when we do, we would like to send them to private school so will set aside money for that in the next few years.

"We currently have four equity investments in an individual savings account (Isa), £30,000 in a very low interest cash account, £1,000 in NS&I Premium Bonds and around £10,000 in gold bars. We have, on average, around £2,000 per month to invest and our appetite for risk is quite high. But we are struggling to find suitable investments. There are so many active and passive funds, and exchange traded funds (ETFs) to choose from it's difficult to work out which are worth investing in. We are also considering investing in another buy-to-let property, but don't want to put all our eggs in one basket.

"We would also like to have a good income when we retire, but are not thinking too much about that at the moment because it’s probably not going to be for at least 35 years. But I have a defined contribution (DC) pension from my previous employer worth nearly £53,000, and have been contributing to my current workplace pension, a defined benefit scheme, for nearly three years. The amount I have put in so far would pay out an annual income of over £2,000 a year.

"My wife has recently joined her workplace DC pension scheme and her pot is worth around £10,000."

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

TAX EFFICIENCY

Rob Morgan, pensions and investments analyst at Charles Stanley, says:

Before worrying about the vast array of investment options available, make sure that you hold your investments tax efficiently. Given your long time horizon, this means holding them within Isas. That way you don’t have to worry about any income or gains being taxable. The £20,000 limit on how much each of you can put into these wrappers every year is ample and your investment choices are not restricted.

You are fortunate enough to be building up a final salary pension scheme which is really valuable. But don’t neglect thinking about pension provision as this is a really tax-efficient way of investing for the future – especially as you and your wife are higher-rate taxpayers. Your workplace pension also has a decent lump sum death benefit, although you might want to review your life and other cover when you have children.

ASSET ALLOCATION

Chris Dillow, Investors Chronicle's economist, says:

You are right to steer clear of another buy-to-let property. I, as do many economists, suspect that house prices will fall back next year after the stamp duty holiday ends on 31 March 2021 and as unemployment continues to rise. Rising unemployment and the low wage growth that results from it is also not good for rental income. And there are other risks with buy-to-let property, for example, even a few weeks without a tenant can mean that rent won’t cover mortgages and it is hard to sell it quickly if you need to.

You are struggling to find somewhere to invest, and that’s normal and healthy. The future is largely unknowable so it should never be obvious where to put your money for the best return. If you think it is, you are probably overconfident – a vice that can lead to many mistakes. Even worse, when it does seem obvious where to invest it’s usually a sign that an asset is overpriced. Housing seemed to be a no brainer investment in 1988 and equities in 1999, after which these markets crashed. So it’s good that you don’t know where to invest.

PORTFOLIO CONSTRUCTION

Chris Dillow says:

There are two solutions to not knowing where to invest. Forget any idea about what the best investments are as we can never tell which these are – optimisation is impossible. Instead, do what Nobel laureate Herbert Simon suggested and 'satisfice'. Settle for a satisfactory or adequate result, rather than the optimal solution, by finding a mix of assets you are comfortable with and then getting on with your life.

Or back the field rather than any particular horse via a fund of funds. An ETF that tracks the world market is, in effect, a fund of all possible equity funds as it tracks many stocks listed on developed markets. Holding one of these will result in exposure to overpriced stocks, but the ETF should also have exposure to underpriced ones. Investing via such a fund protects you from the countless errors of judgment that can cause us to underperform the market.

Global equities tracker funds are also cheap, which is very important for younger investors in particular, as over 20 years an extra half percentage point in management charges could easily cost over £2,000 for every £10,000 you invest.

It would be reasonable for a global equities tracker fund to be your only equity investment. If you feel the need to hold more funds, diversify with an emerging or frontier markets fund. These help to spread the risk that developed markets equities will generally deliver low returns because these economies are trapped in low growth.

You could also consider some private equity investment trusts that spread the risk that not much future growth will come much from quoted companies, but instead from newer, more dynamic ones.

Even a well diversified equity portfolio will sometimes lose money as you are certain to see some nasty and long bear markets over a long investment period. You already have diversifiers against this in the form of gold and cash. Hang onto these while you build up an equity position.

But a global tracker should be the main investment in your portfolio and, if you start investing regularly into one, you’ll soon have a nicely diversified portfolio.

Rob Morgan says:

You don’t seem to want to be especially hands on when investing, so rather than putting money into direct share holdings, funds seem like a more sensible way for you to achieve good diversification. Investing in these would also make monthly investing straightforward.

You have two broad options.

You could select a range of funds that invest in different asset classes and geographies, for example, low-cost passive tracker funds to gain exposure to the major investment areas. These could be a global equities and a bond ETF, as your investment horizon is 10 to 15 years rather than multi-decade. As your portfolio increases in size you could add further areas to diversify and to try and capture growth opportunities, such as smaller companies and emerging markets. But for exposure to these I would be more inclined to use active funds as there are more inefficiencies to exploit and potentially more value to add.

If you invest a set sum on a monthly basis you will iron out market volatility, to some extent. And you will tend to benefit from dips early on, although big market moves towards the end of your investment time frame could have a big impact, so you should review your asset allocation as time progresses. One option would be to weight more heavily to equities in the first five years and gradually diversify into more cautious areas later, although this may compromise overall returns to some degree.

If you aren’t confident in making these sorts of regular investment decisions, you could invest in multi-asset and or multi-manager funds that invest in a variety of assets. These are run by an investment manager who oversees what is bought and sold. But if you opt for one of these don't buy an expensive one. Some multi-manager funds can have very high overall charges because you are paying the manager of the fund you hold, and the managers of the funds they invest in. However, holding one of these enables you to achieve instant portfolio diversification and take a hands-off approach to investing – other than doing a quick check every six months or so to see how the fund is doing.

But there's no reason why you can’t do a bit of both these approaches, holding a multi-asset fund as the core of your portfolio alongside some small allocations to a few other funds as 'satellite' positions.