Each week we ask an expert for tips about investing a £10,000 nest egg. This is the third part of our four-week series highlighting the benefits of regular monthly investment.
Today, Thomas Becket, chief investment officer at the wealth manager Psigma, explains why he uses this strategy for his own and his family’s investments.
Becket, who lives in Tunbridge Wells, Kent, with his wife, Lisa, and children, Betsy, 4 and Freddy, 2, said: “If I had £10,000 today, I would invest about £833 a month over a year and split it equally between growth-focused funds and funds that focus on income.”
This is a safer approach than investing a lump sum, according to Becket. “We have learnt in the post-financial-crisis years that markets are much more volatile than they used to be,” he explained.
“The market peaked almost exactly a year ago [the FTSE 100 closed at a record high of 7,104 on April 27, 2015 ] only for it to fall over the following few months. It now stands more than 10% below that peak. Therefore, if you had invested your entire £10,000 pot last April, you would probably still be sitting on losses.”
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Becket warns against the old adage “Sell in May and go away, come back on St Leger day”, which encourages investors to offload shares this month and not put any money into the markets until September, when the annual St Leger Stakes horse race is run at Doncaster.
“The historical data suggests this is not always a successful rule to follow,” he said. “A better approach is to invest a small amount each month. I do this myself when I open a new Isa or add to my self-invested personal pension. It means I am buying less when prices are high and more when they are low.
“I very much advocate such a gradual approach to clients. We have a number of them who invest in this way to use up their Isa allowances.”
Like Psigma, many investment platforms, including Fidelity and Hargreaves Lansdown, allow clients to invest in funds without paying a fee each time they buy or sell, although annual platform charges apply.
Becket, 37, reinvests all of the income generated by his investments. “This is an important discipline and it forms a big part of an investor’s total return over time,” he said.
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“Longer term, I’m expecting to have to use the income provided by my Isas to help fund my young children’s education costs.”
Below, he explains how he would divide up his monthly £833 investment over a year.
Income funds
For the income part of my portfolio, I would invest in corporate and government bonds. These are sometimes known as fixed-income investments because they involve lending money to companies or governments for a set number of years.
The investor receives an annual return and gets back their original investment at the end of the loan period, assuming the company or government they lent the money to has not gone bust in the meantime.
I am not too bothered about short-term movements in the value of my bonds, so long as they do not default and I am paid my regular income.
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I would put 25% of my regular investment (about £208 a month) in the Neuberger Berman High Yield Bond fund (down 2% over a year), which is primarily invested in bonds issued by American companies.
A further 25% would go into the TwentyFour Income fund (down 10.4% over a year), which has more of a focus on Britain.
Both of these funds yield in excess of 6% and provide adequate compensation for the default risks I would be taking.
In a low-interest-rate, low-growth environment, these yields will be very helpful and I will continue to use them in line with my key mantra, which is: always reinvest income.
Growth funds
I would avoid tracker funds, which mimic the performance of an index such as the FTSE 100. Although the charges are lower than for funds with active management, I prefer to be more selective.
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A key growth element of my investment would be achieved using the River & Mercantile World Recovery fund (down 6.3% over a year), which has a good global exposure. It holds shares listed in countries including Italy, Japan and America as well as in Britain.
The fund also has significant exposure to emerging markets, including China and Brazil. I would allocate another 25% of my monthly investment here.
I would allocate 15% of my monthly sum (about £125 ) to the Mirabaud Global Emerging Markets fund (down 13.8% over a year) for more exposure to emerging markets. This has about 34% in Asian shares and about 15% in China specifically. The People’s Republic should be viewed not only as a significant risk but also as a significant opportunity.
Japan is another country I would concentrate on. In a slow-growing world, the profit growth enjoyed by some of the companies there is worth noting.
Indeed, this year I would expect basically no profit growth at a headline level in America, Britain and the rest of Europe while Japanese businesses are set to enjoy double-digit percentage growth overall.
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I would allocate the final 10% of my monthly spend to the Jupiter Japan Income fund (up 4% over a year).