Investment doctor: How to invest £3,000 for 10 years
“My 18-year-old son has come into a £3,000 windfall. Please could you suggest some long-term investments? He will be investing for at least 10 years and would like to take a medium level of risk.”
Alan Steel, chairman of Alan Steel Asset Management, has been investing and advising other investors for 43 years. He says: “Don’t fall into the trap of sticking the money in cash savings deposits, bonds or absolute return funds because they’re ‘safe’. You only have to look at history to spot that virtually every time the world was allegedly caving in, it was time to keep faith in shares.
“Unless you wholly fancy the US, I also wouldn’t be attracted to index tracker funds. It’s tomorrow’s winners – via actively managed funds that aim to beat stock market indices – that your son should be looking for.
“Charges can be kept reasonable by holding the funds inside a cheaper platform, Moneywise’s platform survey shows Charles Stanley Direct is best value for smaller portfolios, but performance is 10 times more important… as a wise man told me 30 years ago. “Finally, I’d remind him of Warren Buffett’s advice: ‘Hold the investments for the 10 years and leave them alone.’”
Ben Yearsley, investment director at Wealth Club, says: “Ten years is an excellent time frame for investment. Too many investors want a return over a couple of years and chop and change their portfolio too much when nothing is happening or there is slight underperformance. So spend time choosing the right funds and then stick with them.
“Often, a portfolio termed ‘medium risk’ would include bond funds. However, the recent interest rate cut and renewed quantitative easing has left bonds looking very expensive. Property, which could also feature in a balanced portfolio, isn't the best place to look either as many funds are still ‘gated’, meaning investors can neither sell nor buy.”
Both experts recommend your son puts the funds in an individual savings account (Isa) wrapper, where they’ll be free of capital gains tax (CGT), even if the investment is outrageously successful. It might not seem worthwhile now with only £3,000, but who knows what the tax rules might change to in future.
Alan Steel would split the £3,000 between two funds that “seek to take advantage of the unbelievably fast-changing world we live in”. He has held both funds for many years and intends to continue holding them.
He says: “There has never been a time when so many remarkable inventions are sprouting forth in so many directions and disciplines. So I’d choose to invest in a well-run, well-priced technology fund, such as Axa Framlington Global Technology, managed by Jeremy Gleeson for the past nine years. He’s an excellent stock picker – look at the performance of his top five holdings: Alphabet (Google), Facebook, Apple, Cisco, and Visa.
“I’d go half also with a global smaller companies fund, such as Invesco Perpetual Global smaller Companies, managed by Nick Mustoe. In this fast-changing world, smaller companies are likely to grow faster than the big boys and also are likely to be snapped up in time, by the likes of Alphabet, Apple and Facebook which are awash with cash.”
Ben Yearsley suggests splitting the £3,000 five ways, with £600 into each of the following funds:
- First State Global Listed Infrastructure
- CF Woodford Equity Income*
- Margetts Ardevora UK Income
- Lindsell Train UK Equity
- Artemis Strategic Assets
He says: “The core of the portfolio is in UK equites with two equity income funds, Woodford and Ardevora and a third UK fund Lindsell Train. All three have managers who typically avoid fads, invest for the long term and are predominantly invested in larger companies.
“I have been a fan of the First State fund since it launched in 2007. As the name suggests, it invests in infrastructure assets. Infrastructure can be many things; toll roads, airports, ports, power grids, water, mobile phone towers. What this fund does is look to buy into areas that are essential and have to be used, which helps it weather economic storms. An added benefit is that often the payment to use these assets is linked to inflation – something that could rear its head again in the near future.”
The final fund, Artemis, aims to beat both cash and the FTSE All Share over three-year periods. William Littlewood manages it and can virtually invest anywhere – bonds, equities, commodities, and currencies all feature. “Crucially, he can also profit from falls in prices as well as increases,” says Mr Yearsley. “With one eye on the downside, this fund can form a cornerstone of a portfolio.”
*CF Woodford Equity Income is a member of Moneywise’s First 50 Funds selection. For more details visit our First 50 funds homepage.
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Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.