With a lack of young people investing for their future, what can they look out for in the market?
How millennials should be balancing risk and reward
Having just finished university and recently starting a new job, I now have some monthly disposable income with which to contribute towards saving for a house. My graduate role as a junior analyst has enabled me to reaffirm the notion that parking money in cash and cash equivalents just won’t meet my investment ambitions. Consequently I have shifted my focus to investing in relatively low-cost funds, through a Stocks and Shares ISA. This decision has been made after utilising my Lifetime ISA (LISA) allowance for the current tax year. The LISA product gives you a 25% bonus from the government on amounts up to £4,000 per year provided the money is used for a house or retirement, and thus is certainly worth considering.
You may be at the early stages of your career and starting to think about saving; whether for your first property, a dream holiday, a wedding or even retirement. Traditionally many millennials resort to storing their money in the form of cash held in regular savings accounts. However, with interest rates low and inflation creeping upwards the value of your savings is slowly eroded away.
Alternatives to cash
F&C Investment Trust estimates that 78% of those millennials with traditional life goals don’t have appropriate long term savings or investments in place to help them achieve those goals. So what are your options?
Investing in bonds may provide the safest investment besides cash and cash equivalents, but the low amount of risk typically results in a lower level of return, when compared to other asset classes. Stock markets over the longer term have been shown to outperform the cash and bond markets; therefore it is important for millennials to consider investing, particularly when they have an investment horizon of five years or more.
By putting money into age and risk appropriate investments, millennials can put compound earnings to work for themselves. Compounding is the process of reinvesting capital gains, dividends or interest in order to generate additional earnings over time. The largely unrealised phenomenon potentially allows an asset’s value to be boosted quicker. It’s not dissimilar from the increase in the amount of money owed on a loan when interest accumulates on the initial borrowing and previous interest charges – something that those with student or personal loans may have witnessed.
The opportunities of funds
One way of gaining exposure to the stock markets, without the need to conduct extensive research on individual companies, is by investing in funds. Funds are run by managers with the support of investment teams of varying sizes. They span across all asset classes, investment strategies and markets whether it is: equities, commodities and property, or growth and value approaches. By investing in a number of funds, an investor can build a diversified portfolio that gives them exposure to many different areas of the market and can also help to mitigate a degree of risk.
This needn’t be complicated either, with platforms like The Share Centre offering a raft of easily accessible information so that the likes of you or I can invest straightforwardly. There is also a common misconception that investing is only for the rich, which is completely wrong. People with all ranges of income can begin cost effective investing today through a variety of ETFs, Investment Trusts and funds, with contributions of as little as £10.
The current economic climate creates a difficult environment for many investors. This is largely fuelled by the ongoing uncertainty surrounding Brexit, continuing threat of trade wars between the US and China and the ever growing global debt burden. As a result investor sentiment has waned, leading to sell offs in the global equity markets and early indications of a looming recession. Below is a list of funds that form part of a core-satellite portfolio; one that I believe can have the potential to grow capital whilst not taking on too much risk and being over exposed to any one factor. Adjusting the weightings of the funds going forward will also reflect my view on the economic outlook.
This fund invests in a number of high-quality companies that you may be familiar with such as Microsoft, Unilever and Visa. Such companies have dominant market positions, strong pricing power and recurring revenue streams. Entering into a challenging market environment, companies like these should stand to weather market fluctuations well.
The managers of this fund seek high dividend yielding stocks that are believed to be principally undervalued by the market. Value investing, as this is known, has been largely out of favour in recent years owing to the strong performance of growth stocks. However, due to a number of factors, value stocks tend to perform well when there is an economic slowdown – which I believe we will see at some point in the future.
Whilst European equities have been hit hard in recent months, this fund continues to be a stand-out choice in this sector. A high-conviction approach focuses on companies that can yield sustainable profit growth and margins in the long run. This, coupled with strong risk-adjusted performance, has limited losses in down markets and has allowed the fund to comfortably outperform the benchmark.
Royal London Sterling Extra Yield Bond
This is a highly diversified fund that focuses on bonds supported by stable income streams, allowing it to be somewhat protected in times of market turbulence. The manager has over 35 years’ experience, and is well seasoned to deal with market fluctuations and interest rate risk. Bond funds are an important component in a portfolio of funds such as this, due to risk diversification abilities.
Index Tracker Fund/ETF
Vanguard S&P 500 ETF
This fund seeks to track the performance of the S&P 500 index, by investing all or substantially all of its assets in the stocks that make up the index. The index includes 500 leading companies in leading industries of the US economy. For investors wanting exposure to the US, this fund does just that at a very low and attractive total expense ratio of 0.04%. The passive strategy that is employed here is useful as the core part of a core-satellite portfolio.
Baillie Gifford Positive Change
An increasing number of investors are thinking about sustainability and ESG (environmental, social and governance) issues when it comes to investing, especially with more millennials beginning to invest. This relatively new fund from Baillie Gifford invests in companies whose products or behaviour makes a positive impact in one of four areas: social inclusion & education, environment & resource needs, healthcare and finally quality of life. This fund has a global reach with a strong growth bias so could be used as a satellite fund with a relatively small weighting to control risk.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.