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 was on those in their late 20s to early 30s, who might be 'making commitments', and now Wednesday’s asset allocation guidelines are aimed at ‘young families’. Brook Sweeney, Investment Consultant with Morningstar Associates Europe, explains more:
Over the last couple of days we have been discussing some general asset allocation guidelines for those that are young, free and single and those that are ‘settling down’. Today, we are tackling the young family life stage as outlined by the Financial Planning Week’s five ‘life stages’ groupings.
As our asset allocation guidelines are focused on your long-term retirement needs, as opposed to shorter term goals, there is not a great deal of difference between these first three life stages from an asset allocation perspective. However, it is still important to work with your financial adviser to help you reach not only your longer-term goals but also your shorter-term needs. If you prefer to be a ‘DIY investor’, it’s paramount that you have a clear idea of your goals, i.e. what you’re trying to achieve—do you want to spend your retirement enjoying luxury cruises or are you more of a ‘frugal gardener’ type? And for shorter-term goals, such as saving for a mortgage deposit or for your child’s education, it’s important that you can easily access the funds when the time comes. With the UK government proposing to increase university fees to as much as £9000 per year by 2012, we could be seeing the emergence of more US-style products aimed purely at helping individuals invest for further education? In the meantime, ISAs can be a useful tool for investing for shorter-term goals.
Coming back to your longer-term asset allocation needs, much like the young and carefree and those settling down, those in the ‘young families’ life stage are still grouped in the high risk bracket. Note, however, that as you approach the end of this bracket some moderation may be called for. The reason for this high risk bracket approach is that you are still some way off from retirement—68 is now being flagged as the new retirement age, and as such you should be heavily invested in shares or equity-based investments to benefit from this asset class’s historically higher returns over the longer term. The usual caveat applies: higher returns normally come at a cost—the cost of higher volatility, thus investors need to be prepared for this.
So the ‘moderation’ that we’ve called for means that, while in your early 20s you may have had a 90% equity/10% fixed income mix and in your 30s you could have opted for 85% equity/15% fixed income, the next stage of life (we’re assuming you’re 35-50 years of age in this ‘young families’ bracket) would normally imply having at least 75% of your assets invested in share or equity-based mutual funds and the remaining 25% in a mix of perhaps some direct property mutual funds or fixed income funds. Note, again, that 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.
And once again, little has changed from the first two life stages of investing, with the best methods of investing for retirement tending 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). 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.
Thursday’s asset allocation guidelines will be aimed at those ‘making choices’, i.e. your dependents are now independent and you have more choices as to what to do with your income. On Friday we’ll be address asset allocations in retirement—a stage of life that can potentially last more than three decades so requires some close attention to portfolio management.
Morningstar Consulting Europe
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