Investment Adviser’s Ellie Duncan asks a selection of financial advisers whether a multi-asset investment strategy works for three different scenarios
Case studies:
1. Ms Stone is 34 years old, unmarried and has no children. She is an accountant and owns the two-bedroom flat that she lives in, having bought it three years ago. She earns £40,000 a year and invests 4 per cent of her salary in a matched company pension pot. Ms Stone has just been given a £15,000 lump sum following the death of a relative and wants to invest it with a view to buying another property in around eight years’ time. She has £5,000 saved in a cash Isa and no other investments currently.
2. Mr and Mrs Jones are both in their late 20s and recently married. Mr Jones works as a teacher and earns £29,000 a year, while Mrs Jones is on an annual salary of £31,000 as a marketing manager. They are currently renting and now they have paid off their wedding they would like to start saving to buy a house together, with a view to starting a family in six years or so. They have set up a stocks and shares Isa to start jointly saving into each month and aim to set aside £500 a month between them. Neither of them has any investment experience but they are willing to take some risk.
3. Mr Morris is 40 years old and lives alone, having divorced from his wife, with the separation financially finalised. He has two children aged seven and five and would like to start saving some money for when they reach the age of 18. He works as an IT consultant, earning £45,000 and owns the property in which he lives. Mr Morris already has £20,000 of savings in a stocks and shares Isa, which he plans to use to invest in a buy-to-let property as an additional form of income for retirement. He hopes the rental income will bring in approximately £1,000-£1,500 each month.
Patrick Connolly, certified financial planner, Chase de Vere Independent Financial Advisers
With an investment period of eight years, a decision needs to be made, in conjunction with the client, about whether to invest in risk assets or stick with cash. For non-cash investments, it is important to carefully manage risk as this money will be required at the end of the term. This is best achieved with a multi-asset approach investing in a range of equities, fixed interest, property and potentially alternative assets, which shouldn’t all rise and fall in value together.
As they’re looking to save for a house and potentially to have a family, they should first focus on building cash savings using cash Isas. If they have children sooner they will have money that can be accessed easily without risking encashing investments at what might be the wrong time. It is positive that they are investing into a stocks and shares Isa, and once they have some cash savings can focus on this again. Because they have no investment experience a multi-asset approach would be suitable to help manage risk.
For both his stocks and shares Isa and the savings he is planning to make for his children, there is a strong argument for using a multi-asset approach. However, if he is happy with the risks involved, then regular savings over 10 years or more or long-term investments of more than 20 years should be more focused toward equities. As investment sizes grow, or time periods reduce, then a multi-asset strategy becomes more appropriate as capital protection becomes as important as capital growth.
Jaskarn Pawar, chartered financial planner, Investor Profile
A multi-asset solution would be ideal in this situation. Assuming Ms Stone has a healthy cash flow and can afford to invest the money, then choosing a suitable solution that is matched to her personal needs would work well for her. She could buy access to a variety of funds and underlying investments without the complexity of holding them individually herself.
Six years is not a very long time frame to consider for long-term investing, but if they are aware of the risks, and can take on the fact that their investments may reduce in value at the point that they want to buy a home, then it is a possibility. Of course, there may be multi-asset solutions with a relatively low-risk profile that can spread their investments very well over a number of lower-risk investments that could offer the potential for a higher return than they can achieve in a savings account.
Assuming Mr Morris has a good cash flow and some cash set aside as a reserve then investing to build up a pot of money in 11 and 13 years’ time via a multi-asset approach would be well worthwhile. He could choose to take a little more risk if he wants to and perhaps even blend a few different multi-asset strategies to see how these evolve over time.
Aj Somal, chartered financial planner, Aurora Financial Planning
If Ms Stone is looking at an eight-year term, then multi-asset investing would be possible for around £12,000 of the lump sum, with the remaining £3,000 to be used to boost her cash Isa element from £5,000 to £8,000. That would be, in effect, her emergency fund, if she needed access to monies before the eight-year term.
Mr and Mrs Jones should consider using both the cash and stocks/shares elements of a new individual savings account (Nisa). The £500 a month budget can be set aside, with £250 a month going into a cash element, and the other £250 a month going into the stocks and shares element. Although a six-year term is specified, it could be the case the couple may need some funds in three or four years’ time, so the cash Isa element could be used for this short-term purpose and the stocks and shares element for the six-plus years’ objective.
Mr Morris could invest in a multi-asset investment strategy for his children’s savings, as the terms are 11 and 13 years respectively, once the buy-to-let property has been let out and the cost of the mortgage payments and other costs are known. Then the surplus net income from the rental property could be used to fund monthly payments into a stocks and shares Nisa. He should also set aside money for an emergency fund as he is using his existing £20,000 of savings to fund the buy-to-let property.
Martin Bamford, managing director, Informed Choice
An eight-year time frame is typically long enough to consider exposing capital to investment risk. A multi-asset investment strategy can help to manage risks as the negative correlation between different asset classes will result in less volatility than backing a single asset class, while still offering the opportunity to beat returns from cash. Before investing, Ms Stone should compare this option with the repayment of any mortgage debt on her flat and might also want to boost the size of her cash savings.
Any investment risk they take should be minimal with only six years before they want to buy a house together using the funds. A multi-asset investing strategy should limit exposure to equities to no more than 50 per cent of their portfolio at outset, steadily reducing this as they approach the investment goal and moving funds into cash to avoid the consequences of any market crash shortly before they need the capital.
With two different investment goals, Mr Morris could use separate multi-asset investment strategies to expose his savings to investment risk, with the aim of achieving better than cash returns. He will benefit from pound cost averaging by investing regularly. Investing the existing value of his Isa portfolio in a range of investment asset classes will help manage risks over the long term. He should consider allocating this portfolio between UK and international equities, fixed interest securities and commercial property funds.
John Stirling, chartered financial planner, Walden Capital
On the surface it appears that Ms Stone is quite well positioned, with a modest pension and a small emergency pot. A multi-asset investment in an Isa, aligned with her attitude to risk, seems like a good choice, but she needs to be aware that no one can predict the future. If her eight-year plan to invest in property is a definite timed commitment, then any form of asset-backed investment may fail to deliver what she is looking for on the right date.
Cost-effective access to multi-asset investment may well provide the type of investment that the Jones’s require. They appear to have some flexibility in their timescale, and are looking to invest monthly, which can reduce the impact of short-term volatility. The potentially high level of diversification in multi-asset investments will reduce their exposure to any one class of investment, which may be a benefit to those with less experience.
Mr Morris has a clear investment objective, and plenty of time to achieve it. Wide diversification into multi-asset investments provides him with the best opportunity to effectively plan for his children’s future. By further diversifying his personal investments to include residential property, he isn’t removing risk from his investments, but is reducing the likely impact of any one financial shock.
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