Ceri Jones runs through the types of funds that are best placed for different age brackets.
The balance of assets in your portfolio is every bit as important for investment success as the individual stocks and bonds chosen, and the optimal balance will depend heavily on what your savings are for and the timescales involved.
Those with a long horizon can be invested in riskier assets such as equities, as time will smooth the peaks and troughs. While shorter timescales, such as a few years, should be invested in a mix of assets including bonds.
That’s the theory anyway, but just because an asset class has been the traditional recommendation for a certain situation, does not mean you should follow that advice blindly.
Current economic conditions are atypical. In fact, if you had invested in bonds for safety last year, you would be sitting on a loss of 13.7% (Vanguard Total Bond Index). If you add in the effects of inflation, this was the worse year for bonds for almost a century.
In your 20s
Many young people will be saving for a house deposit and for that, a risk-free fixed term fixed-rate savings account is appropriate. However, for long-term savings such as pensions, young people can afford to invest all their remaining savings in equities, which will generally produce better returns than other asset classes.
You could choose a sustainable fund that screens out unethical businesses in favour of companies making a positive impact. Research by RBC Global Asset Management shows a clear correlation between strong sustainability business practices and a company’s ability to outperform the market, so this approach could well pay off, while sitting well with your conscience.
However, UK-focused sustainable funds as a whole underperformed the FTSE All-Share last year, as they have low exposure to the energy sector.
Furthermore, in avoiding activities such as alcohol and gambling, their universe is limited, which can mean a big weighting to blue-chips in sectors such as big pharma and financials.
- How many funds should I own in my stocks and shares ISA?
- My first four years as an ISA investor
- ISA tips: around the world in eight funds and trusts
Most investors are overly UK-centric and for young people with a long horizon, this may be particularly short-sighted. Global sustainable fund options include CT Responsible Global Equity 2 and Baillie Gifford Responsible Global Equity Income.
Always check there is not too much duplication across your fund holdings, particularly in large tech which is omnipresent and remains on rich valuations.
The four funds mentioned all form part of interactive investor’s ACE 40 investment ideas.
All ACE 40 investments are categorised into one of three broad sustainable investment ‘styles’ to help investors find a fund that meets their values. The three categories are Avoids, Considers and Embraces and you can find out more about them here.
Young investors could equally take a very different approach and buy a low charging exchange-traded fund (ETF) linked to the MSCI World, on the rationale that markets generally trend upwards over the years and timing the market is next to impossible.
In your 30s
In your 30s, you may find yourself with a young family and working hard at your career, and so it may be appealing to delegate investment choices to a broad fund with a focus on high-quality stocks worldwide.
Consider F&C Investment Trust (LSE:FCIT), established in 1868. Investment trusts typically outperform funds over the long term, and usually remain faithful to their original mandate, which is perfect if you lack the time for constant monitoring.
Those who seek greater stability could consider iShares Core Aggressive Allocation ETF, a fund of ETFs which holds seven iShares ETFs, focused on developed and emerging market equities, and US mid and small-caps, but with around a fifth allocation to fixed income.
- Tax tips for wannabe ISA millionaires
- Use this neat ISA trick to avoid a big tax bill in 2023
- Should you prioritise pension or ISA saving?
For a portfolio tilt to drive long-term returns, renewable energy and healthcare are attractive options.
One example is the Renewables Infrastructure Group (LSE:TRIG). This investment trust generates income from selling electricity from its wind farms, and solar and battery storage. Inflation should lift these revenues higher over time but this year and next, the government’s windfall tax on electricity generators will be a drag on income, so watch and wait for a good entry point.
In terms of healthcare options, an example is Worldwide Healthcare (LSE:WWH) Trust. The portfolio focuses on biotech and emerging markets rather than the big pharma names. This hurt its performance last year, but should drive future growth.
With many investing decades ahead of you, exposure to developing economies is crucial. Consider BlackRock Frontiers (LSE:BRFI) Investment Trust is over 40% in emerging Asia and 28% in the Middle East, or take advantage of China’s reopening with Fidelity China Special Situations (LSE:FCSS) investment trust, which should be swept along on the juggernaut’s ambitions.
In your 40s and 50s
Your 40s and 50s should be the time when you lay the foundations for a comfortable retirement. Experts will tell you that the most important thing in these middle decades is to stay invested. From time to time, markets will turn down but you need to stay the course to take advantage of the good days that often quickly follow bad days, as we have seen in markets recently.
Over the past 20 years, just 30 up-days account for the difference between an annualised return of 9.76%, or just 0.79%, according to the JPMorgan Asset Management Capital Markets survey.
- ISA ideas: alternatives to the most-popular funds and trusts
- Listen to our podcast: are ISAs or SIPPs the best tax-efficient wrapper?
- Are lifestyle retirement funds right for the 100-year life?
One example of a global equity fund that aims to deliver consistently through all market conditions is Fidelity Global Special Situations, where manager Jeremy Podger endeavours to bring together the best ideas from around the world.
Another option is TB Evenlode Global Equity, which invests heavily in multinationals, such as Unilever (LSE:ULVR) and L'Oreal (EURONEXT:OR). However, it has an unusual bias in the US media and tech space, where it focuses on sub-sectors such as fintech and hyperscalers, which traditionally operated large data computer and storage facilities but are increasingly moving to the edge, allowing customers to reduce latency and support uses such as augmented reality.
Now may also be a sensible time to ensure you hold bonds and other assets. If you don’t want to think about your investments too much, a balanced fund could work as your core investment.
In your 60s
Your 60s are your last opportunity to turbo-charge some of your portfolio ahead of retirement when a more cautious approach will prevail.
Small-cap stocks offer the opportunity of outsized growth, and now may be an excellent buying opportunity as 2022 punished small companies, which typically happens when interest rates are rising and investors are sceptical of their resilience and ability to service their debt. However, many small companies have rescheduled their loans at lower rates.
- How to invest £500 per month in your ISA
- Eight easy ways to boost your ISA returns
- 11 ways to invest your ISA like Warren Buffett
A wave of established companies have slipped into the smaller-cap indices such as Deliveroo (LSE:ROO), Pets at Home Group (LSE:PETS), ITM Power (LSE:ITM) and THG (LSE:THG), which is another sign that the market might turn, as was the case after the bear markets of 1974 and 2008-09.
However, due to the higher risk nature of smaller companies, it is prudent to limit exposure to a small part of a diversified portfolio.
Liontrust UK Smaller Companies fund looks for companies with a durable competitive advantage and has been avoiding cyclical stocks, while Liontrust UK Micro Cap focuses on capital-light businesses that can scale quickly.
Jupiter UK Smaller Companies and TB Amati UK Listed Smaller Companies also stand out, with their long-standing experienced managers. The Amati fund is a member of interactive investor’s Super 60, which also contains Henderson Smaller Companies (LSE:HSL) investment trust.
In your 70s and 80s
In your 70s and 80s, you will probably be looking for an income. M&G Global Macro Bond, Jupiter Strategic Bond and Janus Henderson Strategic Bond are highly flexible and invest across certain regions and parts of the fixed income market, and therefore have appeal at a time when the outlook for bond markets is uncertain.
- The simple maths that can make you an ISA millionaire
- Active or passive: the ultimate guide to investing your ISA
- The seven deadly sins of ISA investing
Investing in dividend-paying companies allows both your income and capital growth. Be aware, however, that current environment of rising inflation and uncertainty have proved a harsh lesson as many companies have reduced their dividends.
You might also diversify into other income-producing assets such as infrastructure. FTF ClearBridge Global Infrastructure Income invests in global infrastructure assets in water, utilities, gas and electricity.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.