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 in varying stages of life. In accordance with Financial Planning Week’s five ‘life stages’, Monday's guidelines were aimed at those in their late teens through to their late 20s, or the ‘young, free and singles’. Tuesday's focus is on those in their late 20s to early 30s, who might be 'making commitments'. Brook Sweeney, Investment Consultant with Morningstar Associates Europe, explains more:
For those of you who are in the 25-35 age bracket and are ‘making commitments’, or are potentially ‘settling down’, you might be surprised to discover that while there may be notable changes underway in your private life, your investment portfolio’s asset allocation strategy need not undergo any serious changes. This will likely come as something of a relief to many—who wants to be juggling assets when you’re already juggling career moves and relationships? At least, this is the case for most people in this age bracket; babies and the need to save for a mortgage deposit are not factored into our guidelines for investors at this stage of life, instead these will be discussed in Wednesday's ‘young families’ asset allocation guide. As with the previous ‘young, free and single’ asset allocation guidelines, the ‘making commitments’ guidelines that follow focus on longer-term retirement needs rather then shorter-term goals.
Similar to the ‘young, free and single’, those that are settling down would normally also fall into into the high risk bracket—that is, they can stomach high risk. This is owing to their long-term investment timeframe i.e. until recently the UK retirement age was 65 for men and 60 for women, but these are already in the process of increasing (more information on the government’s pension age proposals can be found on the Government website) and rising life expectancies means you could have 30 years of retirement to enjoy.
To cut a long story short, the long timeframe for investment that those in their late 20s and early 30s face means they can handle the ups and downs of the equity markets and can be grouped into a high risk bracket. Thus, shares or equity-based investments are still the most appropriate investments for those that are settling down, as over the longer term this asset class has historically provided the highest returns, which means that for the first 15 or so years of your investing ‘career’ (assuming you start saving and investing as soon as you start earning) you need make very few changes to your portfolio asset allocations. These higher returns normally come at a cost, however, that of increased volatility—something that investors need to be prepared for.
For the 'young, free and single'—those dipping their toes into investing for the first time, our guidelines point to allocating approximately 90% of assets to share- or equity-based mutual funds and the remaining 10% in a mix of perhaps some direct property mutual funds or fixed income funds. A few years later and a few years closer to retirement, you may want to make some tweaks to these allocation guidelines but with your investment goal still several decades away any changes will be minor. This means that between the approximate ages of 25 and 35 you could have at least 85% of your assets invested in share or equity-based mutual funds and the other 15% could be invested in a mix of perhaps some direct property mutual funds or fixed income funds. If you already have a mortgage then you do not need additional exposure to property so a higher allocation to fixed income investments would do the trick.
Again, the best methods of investing for the distant goal of 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, but this can take up more time and requires more skill as you need to monitor your investments more closely—something you may be too preoccupied with life to want to worry about. 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
Morningstar Consulting Europe engages with a variety of institutional clients, including investment firms, insurance companies, banks, plan sponsors, plan providers and foundations. The comprehensive array of solutions provided includes portfolio construction and management, strategic asset allocation, manager selection and investment governance/monitoring.
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