‘I’m 50 and save £20k a year into my pension – should I invest it elsewhere?’
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Dear Victoria,
I am age 50, still working, and can invest £20,000 a year into a pension.
What do you think of my portfolio?
– Andrew
Dear Andrew,
You’re clearly in a great position with assets worth almost £134,000 and impressive financial capacity to invest £20k a year into your pension. You’re either a high earner or a very good saver – probably a bit of both.
When you decide to retire is clearly a personal choice, as is how much you think you’ll need to stretch across your pension years. But assuming you are looking to finish work around the state pension age of 67, you have 17 important years to focus on growing your wealth.
If you continue to invest £20,000 every year between now and then, achieving an average annual return of 5pc, thanks to the joys of compounding, you should hopefully be able to grow your pot to more than £800,000, putting you in a fantastic position for a very comfortable retirement.
Looking at your portfolio, I see you’ve kept things very simple with just four funds. There’s no magic number of funds you should invest in, but I’d argue there’s capacity to spread your portfolio across a few more.
There are of course global funds such as those in the Vanguard LifeStrategy range which can capture large swathes of the global equity and bond markets via one fund. But your fund choices are more niche and therefore leave you lacking exposure to certain areas of the market.
At the moment, your portfolio is heavily skewed towards bonds with iShares UK Gilts ETF, Invesco US Treasury Bond and Royal London Short Term Money accounting for 86pc of your portfolio. Income will become increasingly important for you, particularly once you stop working and start living off your pension instead.
But since you’re saving £20,000 a year into your pension, for now the income from your job is clearly more than sufficient to live off. Therefore, I think you need to shift your portfolio’s focus towards capital growth instead so you can boost your pension pot over the next decade and a half.
I’d consider upping your equity market allocation to at least 50pc of your portfolio with some active and passive global fund options as core holdings that will allow you to “own the world”. This will help to increase your growth-producing investments and diversify your portfolio.
At the moment your only exposure to equities is via iShares Global Clean Energy ETF, which has performed very badly for you, down 27pc.
While the green energy transition is clearly a growing investment theme, which could prove to be lucrative long-term, recently higher interest rates, elevated inflation and a weak global economy have punished the sector. Therefore, I think it makes sense to spread your equity holdings more broadly.
Among our favourite list of funds is the iShares Core MSCI World ETF, which tracks around 1,500 shares from developed markets. It has a low cost of just 0.2pc in yearly fees, and it is a top-quartile performer versus global funds (including actively managed ones) over the past five years, returning 71.4pc.
To supplement this, take a look at Fundsmith Equity, managed by star investor Terry Smith. It has been a strong long-term performer but over the past three calendar years it has underperformed global stock markets. However, there’s a good reason why – it is underweight big US tech companies that have dominated stock market returns since the start of 2023.
Terry Smith’s approach is to buy and hold high quality businesses and not overpay in terms of valuation. He is famous for picking “boring” but profitable businesses that can keep making money way into the future, no matter what the economy does.
Given Fundsmith Equity offers investors something very different from the global market I think this would serve as a nice compliment to a global index fund like the one mentioned above.
That way you will gain exposure to both active fund management that has worked very well over the long term and gain exposure to how global stock markets perform. If tech continues to outperform, you will also benefit from the investor excitement around artificial intelligence that has provided a major tailwind to the sector.
Depending on your risk appetite, if you’d like to add in some even higher risk, potentially higher reward, smaller satellite positions, you could go for a dedicated tech fund like Polar Capital Technology or Allianz Technology Trust. Both are very popular among investors on the interactive investor platform at the moment.
Polar Capital Technology owns five of the so-called Magnificent Seven tech giants and Allianz Technology has top 10 positions in six of those seven stocks. You may also consider a small allocation to an emerging markets fund such as Pacific Assets, JPMorgan Emerging Markets and Utilico Emerging Markets which are emerging market favourites among our funds team.
To make space in your portfolio for more equities, I would consider reducing your large position in the Royal London Short Term Money Market fund. Currently, money market funds are a great option with the Royal London fund offering a yield of 5.1pc, but these funds aren’t going to offer this level of income indefinitely as yields are sensitive to interest rate fluctuations.
Rate cuts will lead to lower yields for these funds. Moreover, investing in equities has been a more effective strategy to beat inflation over the long term. Money market funds certainly play an important role as a defensive part of a balance portfolio. But having more than half of your portfolio invested here is too high as it means you’re missing out on more compelling long-term growth opportunities.
The two bond exchange-traded funds (ETFs) you have, which provide exposure to US Treasury Bonds and UK Gilts, I would view as tactical plays to try and profit from the likelihood of interest rate cuts materialising. The position sizes of both ETFs also reflect that these are tactical investments as the positions are relatively small.
I would also suggest a more diversified bond fund that can invest in any part of the bond market, such as Jupiter Strategic Bond. It has 58pc in corporate bonds and 35pc in government bonds, including those from emerging markets such as Brazil. Since the fund is much broader, you might also consider allocating a greater percentage to it.
Hope that helps and good luck on your investment journey!
Victoria is head of investment at Interactive Investor. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.