In our weekly series, readers can email in with any question about their finances to be answered by our expert, Charlotte Ransom. Charlotte has 30 years’ experience working in financial services and wealth planning, including 10 years as a partner at Goldman Sachs. She co-founded Netwealth, which specialises in low-cost investing and financial planning advice. If you have a question for her, email us at [email protected].
Question: My father left me £100,000 in his will and I’m planning to just invest this in a few funds that track the FTSE 100 – probably through an investing platform. If I don’t need access to this money for over 10 years, is this the best approach, or should I be looking to invest in property, pensions or anything else?
Answer: This is an important question as it speaks to one of the fundamental attributes of sensible investing – which is to be well diversified. Although investing in the FTSE 100 means you may be diversified across UK companies, there is more you should do to enhance your investment pot’s resilience and make it better positioned for growth.
It is certainly a good idea to have some investment exposure to the UK. FTSE 100 companies typically operate in markets throughout the world and often generate much of their profits from a global customer base, while the FTSE 250 is more focused on core UK businesses – so a mix can be a good idea.
However, the UK is just one constituent of potential sources of return. While the UK is naturally important to investors at home, it is dwarfed by the scale of opportunities you could miss out on if you are not invested further afield as well. As at the end of 2023, the value of global stock markets was over $100trn in market capitalisation. The UK’s total market made up less than 3 per cent of that. Therefore, if you are only investing in UK companies, you are missing out on potential gains from over 97 per cent of equity in companies worldwide.
The US makes up a big chunk of this, perhaps disproportionately so. Yet miss out at your peril: in the 10 years to May this year, the FTSE 100 delivered around 80 per cent in total returns, while the US S&P 500 index delivered around 220 per in total returns.
For a portion of your investment pot, you might also consider a global selection of suitable bond investments and potentially other assets, such as commodities, to enhance your portfolio’s growth and protection potential.
This will ultimately come down to your risk appetite, since equity investments will tend to have a more volatile return profile than bonds, with the commensurate potential to supply greater returns over time.
Should you invest in property or a pension?
In your query you also ask whether you should invest in property or a pension. I address the question of pensions a bit later in this piece; meanwhile, we explored the factors affecting property investing in this recent article and the situation now is quite clear: the challenges of persistently high interest rates, increasing regulation and fewer tax breaks means the prospects for property investors are likely to be daunting for some time.
This demanding environment for investment property is before you factor in the hassle of managing and renting out a property – do you really want to be potentially responsible for the comfort and maintenance of others, or are you simply interested in making your money work as hard as it could?
How can you make your investments as efficient as possible?
If we therefore revert to the position highlighted above – being globally diversified by assets and by geography – how can you make these investments as efficiently and effectively as possible? Some people choose to do it themselves, investing in index or tracker funds that give you exposure to global stock markets.
However, this is not always as efficient as one might think, since there are costs associated with the platform and funds that you choose. There is also the requirement for you to keep balancing your investment over time if you choose to.
With major elections taking place around the world, wide-ranging geopolitical conflicts, persistent interest rate uncertainty, the inflation battle being won and lost in different locations, and more, you can expend considerable energy and time trying to devise an investment strategy that anticipates and reacts to such disparate events.
If someone is creating the diversified portfolio for you, the key is to have cost-effective asset allocation – where the wealth manager (or similar) makes assessments based on the facts and their experience, and then executes investment decisions on your behalf. Effective asset allocation – choosing the mix of regional and sector exposure in our example, requires considerable resources, an expert appraisal of many moving parts and – ideally – an embedded philosophy of acting cost effectively.
Use ISAs or pensions for tax efficiency
The relevance of a cost-effective, globally diversified investment approach is hard to deny. You can then further optimise your wealth by considering which tax wrapper might be right for you. Investing through a pension is a popular choice, for good reason: if you are a basic rate taxpayer, for every £8,000 you invest in a pension the government will boost that to £10,000. Higher rate taxpayers are eligible for a further 20 per cent to 25 per cent tax relief, which they can claim back on their self-assessment tax return.
You can invest up to £60,000 a year in a pension, depending on your income. You can also shelter up to £20,000 a year in an ISA from the taxman and never have to pay tax on investment growth or if you take an income from this account.
With your time frame of 10 years or longer, either of these (or a combination of the two) may be appropriate. What’s crucial is that the underlying investments in your £100,000 inheritance pot – rather than just relying on the companies of the FTSE 100 – are suitably diversified, and brought together on your behalf at the right all-in cost. This will help you to increase the chances of both protecting and growing your wealth for the long term.
