The plan to purchase additional properties should not be the priority as Daniel would likely need to take out more debt to fund them, which may not be the most appropriate route to take. Property would also lead to a lack of diversification across his asset base and would be more illiquid than alternative investment options.
Relative to Daniel’s expectation for returns of 5-10pc per annum, I would anticipate long-term annualised growth for a moderate risk portfolio to achieve approximately 6-7pc. As Daniel is looking to have little involvement with the investments once he makes them, I wouldn’t suggest buying stocks directly.
To diversify his portfolio, he should invest across a range of global equities, bonds and alternatives like commodities or gold. I would discourage an allocation to gold representing more than 10pc of his investments and ideally less.
Without the ongoing support of a professional investment manager, Daniel may want to consider a passive approach to gain exposure to the right asset classes at a cost-effective price.
For his risk profile, he may wish to split about 40pc of his investments between the iShares Global Government Bond ETF and HSBC Global Corporate Credit Fund which will provide a good mix of bond exposure. He should then allocate about 50pc to Lyxor Core MSCI World ETF for his equity exposure, leaving 10pc for alternatives.
Other factors that Daniel should consider, if he hasn’t already, include life insurance or serious illness to make sure his family is protected.
Craig Rickman, personal finance expert at Interactive Investor and qualified financial planner
The investment strategy that is right for Daniel must centre on his core financial goal, which is to accrue sufficient savings to build his own home within the next ten to twenty years.
There are several things to factor in: his personal appetite for risk, affordability, investment timeframe, and access requirements.
Let’s first focus on asset allocations. Daniel describes himself as having a moderate risk appetite, which suggests that he’s comfortable with the ups and downs inherent with stock market investing but would like some protection from market falls.
Daniel’s preferred asset weighting is two-thirds stocks and one third gold. However, while gold is a useful addition to any portfolio, acting as a counterweight to the likes of equities, allocating a third of his portfolio to this asset might not be the best approach.
Historically gold has proved a “safe haven” for investors, but it can still be volatile over short periods. Instead, aiming for a smaller weighting to the metal, say somewhere between 10pc and 15pc, would be more suitable.
A further drawback of gold is that physical holdings such as bullion or coins can be liable for capital gains tax when sold, which could take a sizable bite out of his home-building fund.
Daniel may be better served by spreading his portfolio across a more balanced range of assets, diversified across different sectors and regions. For the sake of simplicity and easy maintenance – two things which are important to Daniel – he can achieve this within a single fund, particularly one that keeps costs low.
The Vanguard Lifestrategy 80 fund – which invests 80pc in global equities and the rest in global bonds and fixed interest – could do the trick. Not only does the fund charge low fees, but it will enable him to take a hands-off approach with portfolio management.
Returns of 5pc a year after charges are certainly achievable, but 10pc might be ambitious. That’s unless Daniel is prepared to be more speculative. Upping equity allocations and watering down bonds and fixed interest could be one way to boost growth potential.
It goes without saying that Daniel will want to pay as little tax as possible, which brings us onto which products to choose to hold his investments. As always, tax efficiency must be complemented with suitability.
It’s worth exploring pensions first given the upfront tax advantages, which could give his savings an immediate boost of at least 25pc. The problem here is that, under current rules, the earliest Daniel will be able to access the money is likely to be age 57.
If he needed to get his hands on his investments before this point, which is possible given his time frame is somewhere between 10 and 20 years, it could throw his house-building goal into jeopardy.
Therefore, it could be more suitable for Daniel and his spouse to each funnel up to £20,000 of their annual savings into stocks and shares Isas. Although there is no upfront tax relief, they will have the flexibility to sell their investments at any point in the future to fund their home-building goal without worrying about HMRC grabbing a slice.
Finally, with regards to saving for his three children, Daniel could open Junior Isas. This must be balanced against his own financial goals. Namely, he would need to be happy to relinquish ownership and control of the funds.
As an alternative, Daniel and his spouse could top up their own Isas, providing they have sufficient allowance to spare, then gift the money to their children when they see fit.
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
