If you’re in your 40s or 50s, there’s a good chance you are already investing, be it through a pension or other scheme
By Edmund Greaves
Having an investment portfolio in addition to your pension could be a good way to increase your preparation for retirement - whether you’re planning to stop work completely or just cut back on your hours.
As such when thinking about your investment portfolio, it is important to consider these pots alongside any ISA you may open. Having a unified approach, and even holding different kinds of assets between a pension and an ISA can be a clever way to balance risk.
Most likely you will be invested in something in your workplace pension already. In many cases you won’t have a choice, or a very limited one. It might make sense then to at least understand what your pension is invested in and to think about something different for your ISA. If you have several workplace pension pots, you should consider consolidating them into one manageable Self Invested Personal Pension or ‘SIPP’.
Investing in your 40s and 50s can be a bit more involved than when you start off investing at a younger age. Not only is your timeline closer to retirement, meaning you have less time to see your investments grow, but someone aged 40 will also have a very different set of needs to someone aged 55. However, you’ll also hopefully be in your prime earning years which means you’re more able to set aside more of your income for your future.
Here are four things to consider when investing in your 40s or 50s.
The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.
EQi does not provide investment advice. If you are in any doubt as to the risk or suitability of an investment or product you should seek advice from an independent financial adviser.
The extent and value of any ISA tax advantages or benefits will vary according to the individual's circumstances. The levels and bases of taxation may also change.
The first thing to consider is what your priorities are for the money you intend to invest. If you have a timeline in mind that is longer than five years, you are probably going to be more focused on growing the size of your pot.
If you are closer to 55, you may be starting to think about winding down a bit on your career and enjoying the fruits of your labour. This means you should probably think more about generating an income from your portfolio, but with some capital growth too.
Even when you are in your mid to late 50s, with average life expectancy in the UK at 81 years old you should be thinking about the next 20 plus years. This means you will probably be looking to generate an income from your investments for many years to come.
As a general rule of thumb, as you get older, your investment portfolio should shift gradually away from a focus on ‘growth’ investments towards ‘income’ investments. Of course this is dependent on your own circumstances, and if you’re 59 years old and intend to keep working for another decade, then some growth investments will still be fine for you.
While growth and income is typically differentiated between buying equities – company shares that will grow in value – and bonds – company debt that will produce an income – it is a little more varied than that.
Many equity-invested funds are actually tasked with primarily providing an income, while some bond funds are designed to create growth in asset value. Investment trusts, a type of fund that is structured differently from normal investment funds, often are focused on income too.
It is important to understand the purpose of the funds you are investing in, growth or income. Whether you do that through equities or bonds, or most likely a blend of both, will come down to your appetite for risk and time you have to recover value if markets fall.
As you get closer to retirement – or at least wanting to rely more on your investments for an income – your portfolio balance should shift to investments that offer income over capital growth. Income-focused funds will typically prioritise income and capital preservation, but some offer modest capital growth too.
When considering these kinds of funds, look for the “yield”, which is the typical income that it pays on an annual, quarterly or monthly basis. Higher yielding funds will pay a bigger income, but be aware they will also be invested in riskier assets.
Once you’ve decided whether to focus on growth or income, you’ll need to decide what your risk appetite is. Unlike a younger investor, your timeline is a bit shorter and therefore less time for your investment to grow, so you should probably be a little more conservative with what you have in your portfolio.
A 25-year-old investor might focus solely on equities as these offer the best long-term growth prospects. But an older investor should have a mixture of other kinds of asset too – think of it as a kind of insurance policy in case the markets take a downturn.
Typically bonds are the best alternative to equities and will help minimise the impact of a market downturn on your portfolio. Bonds are not a share in a company, but a debt to be repaid, with interest. The value of these bonds will change over time so you can grow your portfolio this way too – albeit more modestly. Bonds also have the benefit of yielding more than equities in most circumstances. Bond yields also don’t disappear like company dividend income payments sometimes do.
A further insurance policy in a portfolio is precious metals such as gold, or even just some cash. Both essentially don’t react to economic condition changes in the same way as company stocks and are therefore a great alternative.
Once you have an idea of what kind of balance you want to give to your funds, you’ll need to consider more specifically which to hold.
A blend of passively managed and actively managed funds is a good starting point. Passively managed funds are generally cheaper in terms of management fees, but don’t provide as much flexibility as an actively-managed fund.
When it comes to capital growth with less possible downside, global growth funds are a good option, as are funds in reasonably mature markets such as the US or Europe.
Another good option for someone who wants a blend of equities and bonds are funds that automatically do this for you, such as the Vanguard LifeStrategy range.
These Vanguard funds are specifically designed so you don’t have to think too hard about anything other than the weighting. For example, the Vanguard LifeStrategy 60% Equity fund does what it says on the tin – 60% of the fund is invested in equities, with the rest in bonds.
Other than that, you can look at funds that track commodities such as gold. A good example of this is the iShares Physical Gold ETC. This cheap fund tracks the price of gold and makes for an excellent diversifier that will preserve the value of your portfolio when markets are struggling.
Also in this series:
How do you know where to start when there are so many funds to choose from? Start with just three, aligned to your appetite for risk.
As you build your confidence over time and know what to look for, it helps to have more choice. See our top fund picks aligned to your investing goals and your appetite for risk.
We've added new fund lists for experienced investors, so whether you're looking to invest in Emerging Markets, US equities or ethical funds, we've got three starter funds to choose from.
This article was written by Edmund Greaves, personal finance journalist.
The views and opinions expressed by the author may not necessarily represent views expressed or reflected by EQi.