Matthew Harris worked for a number of years as an investment manager. But when it comes to his own retirement savings he prefers to stick to passive investments, so he can avoid “the risk of a fund manager making poor decisions”.
He explains: “From working in the investment industry I know that fund managers can outperform the index. But I’m looking at the long-term when it comes to my own pension money; a thirty-year plus timeframe. Most fund managers don’t outperform over these longer timescales. In fact most won’t be in the same job for anywhere near this length of time.”
As a result he’s decided to invest the bulk of his pension money in low-cost passive funds. Taking this long-term view means he has focused on pension investments, rather than ISAs.
He says: “I take the view that if you investing in equities then you need to be prepared to lock your money away for at least 10 years. To me there doesn’t seem to be much point investing in an equity ISA, when I could put my money into a pension and get upfront tax relief on top. Rather than putting £1,000 into an ISA I get £1,250 by investing the same amount into a pension.”
Harris points out he is 41, which means he could access these pension funds in just under than 15 years, should he need to. However he says: “These are earmarked for my retirement. If I think I’ll need the money sooner I prefer to keep it in cash savings.”
Taking His Own Investment Advice
Harris now runs his own financial advisers Dalbeath Financial Planning, based in Dunfermline with his wife, Wendy Cochrane. He says he tries to apply the advice he gives to others when it comes to his own savings.
Diversification is key to pension saving, he says. Getting the right spread of assets is more important than which individual funds you hold, he says.
“Currently I have around 60% of my portfolio in equities. This is split between UK and overseas funds. All are tracker funds run by Fidelity, Black Rock, Vanguard and L&G.”
He then has around 15% exposure to corporate bonds, and15% in government bonds - both of which are again in passive funds.
Opting for Active When it Comes to Property
The remaining 10% of his pension is invested in commercial property. Here, he has opted for a more active approach preferring funds that buy bricks and mortar rather than tracking the shares of commercial property companies.
He says: “Nine out of 10 years commercial property will deliver a good steady income. The value of the rents of a shopping centre in Essex have very little correlation with the stock market so this is a good diversification holding.” He points out that when markets fall, these falls can be dramatic and funds can be illiquid.
But he says that the active management of these funds now mean most carry a larger cash holding, up to 25% of the fund can be in cash, to help manage these redemptions.
Harris invests in both the Henderson and Threadneedle UK commercial property funds. Neither of these funds have a rating from Morningstar but both have delivered steady income in recent years combined with capital growth in recent years.
Buy-to-Let Alongside Stock Market Bets
Alongside his pension he is also keen on the buy-to-let market. Harris currently has nine properties in the Dunfermeline area. He says: “These have been good investments to date, yielding around 7 to 9%.” But he says recent Budget changes are likely to make this a less attractive investment in future.
“The stamp duty changes - which see an additional 3% tax levied on second home purchases - haven't yet been applied in Scotland.”
But Harris says he thinks “it is only a matter of time before the Scottish Parliament makes a similar move”.
He says: “Our properties aren’t mortgaged to the hilt so the change to mortgage interest won’t hit us too hard. We will keep our current holdings but I don’t think we will be adding to them.”
He says most are small one or two bed flats. “These are cheaper to buy but often easier to rent, with good yields in this area.”
