Advice from the Architas wealth manager and director of investment Adrian Lowcock.
We have a tradition to ask a specialist every week about good options to invest £10,000. During the next month, we will focus on the youth in their twenties – the time when most people get their first full-time jobs and some money they can save. The focus is our response to many emails from our young readers about how to start investing.
Adrian Lowcock, who works as a wealth manager with Architas, says that start saving when you’re young is one of the most productive ways to become wealthy. He says that when you’re young, there’s plenty of time to establish a great investment portfolio and cover the loss of another financial crisis, like the one of 2008. So, starting earlier, you open more opportunities, as time is precious here.
Lowcock, 41 — who lives in
Bristol with his wife Romana and their two daughters, Evelyn, 2, and Sophie, who is six weeks old — said the first decision is whether your investment should be in a shares Isa or a pension.
“Both have their benefits but each is designed to achieve different goals,” he said. “With a stocks and shares Isa, you don’t have any tax to pay on any of the income or growth you make from the investments. In addition, you can get at the money held inside an Isa, with access only limited by the nature of the investment; some might have fixed holding periods or take longer to sell.
There are two main differences with a pension, either a self-invested personal pension (Sipp) or a workplace scheme. First, any contributions are tied up for longer: generally, you cannot gain access to the money until you reach 55 — and this is set to rise. Second, investments in a pension attract tax relief based on your personal income tax rate. For example, a basic-rate taxpayer could put £8,000 into a pension and the government would raise this by £2,000 to £10,000. Higher rate and additional rate tax-payers can claim back more via their tax return when you efile your taxes.
Do your research to find the cheapest platform for making your Sipp or Isa investment. For example, Hargreaves Lansdown charges 0.45% a year to invest in funds, for portfolios of £250,000 or less. However, rival platforms such as AJ Bell and Charles Stanley Direct charge 0.25% for similar services.
Lowcock added: “The key is to have a broad, diverse portfolio and to be patient. Investing is not for those looking to get rich quick. It can take time for a good investment to reach its full potential. And don’t just buy because you heard a tip from a friend; spend some time on research and checking the facts and figures.”
Here Lowcock outlines what he believes is a suitable portfolio for someone in their twenties, assuming they plan to invest the money for at least 10 years rather than looking to put down a deposit on a home in five years’ time.
Fidelity Global Dividend (up 23% over 12 months)
This fund invests in companies across the world and so provides a well-diversified portfolio. The manager, Daniel Roberts, picks businesses that pay reliable, inflation-beating dividends. This means you get a “real” return — one that is not eroded by the rising cost of living.
The fund has about 50 holdings and is focused on large companies, such as Johnson & Johnson, the drugs company Glaxo Smith Kline and British American Tobacco.
For all the focus on strong dividends, if you are investing in your twenties and have an income from a job, it would be a good idea to reinvest those dividends. That would help to boost investment growth.
The annual charge for the fund, which is paid on top of the platform charge, is 0.97%. However, different platforms may charge differently as they negotiate deals with fund management companies. This is also the case with the two funds below.
I would put £4,000 of my £10,000 in Fidelity Global Dividend.
Franklin UK Smaller Companies (down 5.5%)
If you have time to invest, as someone in their twenties will, it is a good idea to back companies or sectors in expansion mode. Smaller companies focus on growing their business; larger companies, such as those backed by the Fidelity fund, tend to concentrate more on growing their income streams, because they have already achieved significant growth.
However, a smaller company is a more risky investment — so you have to accept volatility in the performance of this fund.
The managers, Richard Bullas and Paul Spencer, are willing to take a contrarian stance by investing in areas that have fallen out of favour with the stock market.
The fund’s top holding is Scapa Group, a global manufacturer of adhesive-based products, and Restore, a records and data management company. I would invest £3,000 here.
The annual charge is 0.83%.
Newton Real Return (up 7.3%)
With my final £3,000, I am seeking some security. This is very much a get-rich-slow fund. The first priority of the manager, Iain Stewart, is capital protection.
The Real Return fund comes in two parts. First, there is a core element that invests in shares and bonds with a long-term perspective and low turnover. Outside the core, Stewart invests in cash, government bonds and derivatives in order to reduce risk.
The top holdings include American government bonds, which pay a fixed income, as well as a low-cost tracker that mimics the performance of gold. Both are considered relatively safe investments compared with shares.
The annual charge is 0.79%.