This week is Financial Planning Week, hosted by the Institute for Financial Planning and supported by Morningstar. Financial Planning Week aims to raise awareness of the benefits of financial planning, whether through some simple financial planning steps or working with a professional financial planner. Alongside this, all this week here at Morningstar.co.uk we’ll be offering insights into asset allocation guidelines for individuals who’ve successfully managed to plan their finances and want to put their hard-earned cash to good use. In accordance with Financial Planning Week’s five ‘life stages’, Monday’s guidelines are aimed at those in their late teens through to their late 20s, who for this purpose we'll tar with the same brush and call the ‘young, free and singles’. Brook Sweeney, Investment Consultant with Morningstar Associates Europe, explains more:
For those of you who are lucky enough to be ‘young, free and single’, your asset allocation strategy is generally relatively simple. This is due to your relatively long-term timeframe for investment—until recently the UK retirement age was 65 for men and 60 for women, but these are both set to increase to 68 in the coming years (more information on the government’s pension age proposals can be found on the Government website).
In a nutshell, shares or equity-based investments are the most appropriate investments for young, free and singles as over the longer term this asset class has historically provided the highest returns. However, these higher returns normally come at a cost—the cost being increased volatility, thus investors need to be prepared for this. The theory is that you can handle higher levels of volatility as you have a long timeframe for investment, thus you can handle the ups and downs of the equity markets as equities should produce higher returns over the longer term. As such, young, free and singles would normally be grouped into a high risk bracket. This means that you would normally have at least 90% of your assets invested in share or equity-based mutual funds. The other 10% could be invested in a mix of perhaps some direct property mutual funds or fixed income funds.
For most investors in this young, free and single age bracket, the best methods of investing for retirement tend to be pension funds, due to their taxation advantages, followed by making the most of your ISA allowance, and then investing in normal mutual funds (if you have anything left over). Investing in equity directly is also an option. However, this can take up more time and requires more skill as you need to monitor your investments more closely, which not all investors in this age bracket are too keen to do as they’re busy focussing on being young, free and single! Of course, it’s important to note that these are general guidelines to asset allocation as individual circumstances, and individual goals, may dictate something different.
Morningstar Consulting Europe
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