A millennials guide to retirement
An unexpected consequence of starting this role six months ago is that people now openly talk to me...
Remember how I saved £300 in a year by cutting down on Starbucks? Now it’s time to put it to better use by investing it for the future. £300 a year isn’t exactly going to make me a millionaire, but when you look at a forty year time horizon and retirement, that extra £300/yr could add up in my pension pot.
One of the great things about starting to invest when you are young is you have a long time frame, so it’s okay if your investments hit a few setbacks. That’s not to say I want to fill my ISA with really high risk choices but, if I diversify my money by investing in a few different funds, I can be a more aggressive, knowing I have forty years to ‘recover.’
‘I like coffee because it gives me the illusion I might be awake,’ – Lewis Black, comedian
A bit of a misnomer, this trust has no particular focus on Scottish investments and nothing to do with mortgages. Its name simply stems from its long history, which dates back more than 100 years. Today, it invests in companies from all around the world. Up to 25% can be invested in unlisted companies – businesses yet to make it to a stock exchange and that you wouldn’t usually have access to. But if you are looking for a global fund that can tap into some exciting ideas, it might appeal, as the managers also look for companies that have the potential to disrupt industries – many of which are technology stocks. It’s also one of the cheapest actively managed funds around, costing just 0.37% a year.
Learn more about investment trusts here.
This fund invests in small companies across the globe – including emerging markets. Smaller companies tend to outperform larger companies over the long term and, using the power of the fund manager’s ‘Matrix’ system, this fund is well placed to capture this trend. The Matrix is a screen that filters for four key attributes; quality, growth, momentum and value. The financial accounts of a potential company, will then be researched thoroughly, looking at the quality of its earnings to make sure it is on a sound footing. The investment case is then verified using an extensive database of company meeting notes, and/or further consultation with the company’s management team.
For those wanting to take less risk or who want to invest responsibly or ethical, this fund is an option. It invests in bonds from higher quality companies but, importantly, excludes those that conduct business in areas deemed to be unethical: no mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco businesses make it though. All of the fund’s investments must also have at least one positive environmental, social or corporate governance quality. Another plus for many is that this fund usually has one of the highest yields in its sector – and this income can be reinvested if you don’t actually need it right now.
Learn more about ethical investing here.
This is also a lower risk option as, in essence, it is divided into two portfolios: one investing in bonds and one investing in equities. It is very conservatively managed and is split roughly 70%–30% between fixed interest and stocks respectively, with a maximum 35% in the latter. There are two managers who look after each ‘pot’, but they attend meetings together and, if they like a company, decide between themselves if the equity or their debt is a better option. The managers meet with company management teams on a regular basis to further their understanding of the business environment and stay abreast of issues affecting companies and the customers they serve.
While there are a number of funds that invest in commercial property – warehouse, retail parks, etc. – this is the only fund in the UK that invests solely in private rented sector housing. It aims to capture UK house price growth and also provide an element of income. So if you are investing for a house deposit, or even to pay off your mortgage when you retire, it could be a good option, as it should perform in line with house prices. The process of this fund is based on searching for locations that offer good rental demand, as well as strong underlying owner-occupier demand. The managers take a view on the economic conditions nationally and regionally in order to identify areas of the country offering the best risk/return profile.
Read more about investing in property without a mortgage here.
Investing in Asia or emerging markets can be higher risk, but it can be rewarding. The US was an emerging market not so long ago, believe it or not, and look how far it has come today. This fund invests in companies across the whole Asia Pacific region, including Australia. Unusually, it has 36 equally-weighted stocks, and a ‘one-in, one-out’ policy, which means there isn’t a long tail of smaller holdings, so each stock can make a meaningful contribution to performance. The managers focus on companies that can sustainably grow their dividend into the future, and the holdings are continually assessed to see if there are better opportunities.
Over the past five years, if you put £50 a year in each of the six funds above, your £1,500 would be sitting at £2,048*. These fund suggestions are just a starting point. Be sure to do your research or contact a financial adviser if you think you need one. I doubt you’ll regret investing even a little bit of money in 40 years time, when you’re withdrawing from your pension – all with the thought that this money used to be earmarked for the coffee run.
Making your first investment? Read our 60 second guide to making your first investment here.
*FE Analytics, total returns in sterling, annual contributions of £50 into each of the six funds mentioned to 12 December 2018.