Winter Investment Outlook

Education - managing your portfolio for a longer life

The world is changing, and so are we. Yet, with change comes opportunities, which is why it’s important we prepare ourselves.

Over the next few years a number of key events are likely to have an impact on our lives. We have identified three issues which will affect you, and have considered how you might adapt to make the most of the opportunities which emerge from them.

Central to this is reviewing your investment portfolio to ensure it still fits with your lifestyle requirements. Did you know, on average, TD Direct Investing customers log in to their accounts 11 times a month. Is that enough? Or should you be doing it more often?

There is no right or wrong answer and it depends solely on you and what you want to achieve but with so much change likely, it is important to stay in control and hopefully we can help you do that.

We’re living a lot longer

It’s an indisputable fact that we’re all living longer. Improved diets and better healthcare are contributing to the fact that people being born today have a much higher chance of living to a ripe old age than previous generations, and are far more active in their twilight years. It’s entirely possible that you or your children could live beyond 100.

Life begins at 70

  • Anyone aged 20 in 2011 is six times more likely to live to 100 from birth than someone aged 80 in that year

  • A male born in 1991 has an almost one in five chance of living to 100, while more than a quarter of females born that year will reach the milestone

  • For those aged 50 in 2011, men have an 11% chance of reaching 100 and women 16%. For those born in 1931, these figures are much lower, at 2.5% and 5.1% respectively.

These are compelling numbers. You can see from the chart below that average life expectancy for England and Wales is on an upwards trajectory and we assume will continue to rise.

Life expectancy for babies at birth by sex and country

Life expectancy for babies at birth by sex and country
England and Wales, 1991-1993 to 2012-2014
Source: Office for National Statistics

This has major implications for the way we invest and the way we manage our investment portfolios over the course of our lifetimes. While the fact we’re living longer means we potentially have a longer time horizon for our investments to grow, it also means we will have to provide for ourselves for many more years than would have been likely in the past. You should be investing for growth irrespective of whether you are young or old. 

The State Pension age is rising

The State Pensions Act 2014 recognised this fact, and has introduced a mandatory regular review of the state pension age (SPA) at least once every five years. From 2020 the SPA for both men and women will be 66, an increase from the previous ages of 65 for men and 60 for women. This will subsequently rise to 67, and will be linked to life expectancy thereafter. If you’re a millennial (i.e. born in the eighties or nineties) you’re probably going to be working well into your seventies.

The traditional model was to grow your assets until retirement, then go into a “decumulation phase” where the focus was on drawing an income. However, if you retire at 60 or 65 you will need to provide yourself and your spouse for another 20 to 40 years; therefore you need to be investing for the long term even at 65. Also, you may wish to continue working or indulge in a hobby, or splash out on a big ticket purchase or travel the world. This change in the way we live our lives later in life, combined with increased life expectancy, means you may want to keep growing your assets for much longer.

How can you achieve this? The time to act is now. Start today by putting aside some money for later in life. It’s never too late to start. Even if you are close to retirement age you should still consider yourself young and invest for the future. As we are coming to the end of another tax year it’s worth checking if you’ve used all your taxable allowances in your pension. Then make sure that you have invested in your stocks and shares ISA. Whatever your age, it is essential is that you start investing as soon in life as possible.

Can you deal with risk? We would argue that you can and should be prepared for your investments to rise and fall depending on the market and economic environment. However, there are some tips you must follow:

  1. Diversify. That means buying a few different investments that are investing for different reasons and in different geographic regions. Don’t put all your hope into one investment.  We research the universe for you and put our best ideas in our Recommended Funds list so you can pick and choose from there. We also offer our Quick Start Funds, which are already nicely diversified for you to get started with straight away. For investment ideas, take a look at our article elsewhere in this Investment Outlook on Opportunities in a changing world.
  2. Take a long term view. You would be right in thinking the markets can be volatile (our word for saying they go down as well as up). You need to think about your long-term goals. Do you have a strategy in place which will enable you to meet these? You then need to ensure you stick to this strategy over the entire period of your investment.
  3. Keep just enough cash aside for a rainy day expense. Don’t rely on your long-term investments to cover short-term or emergency expenditure.

All you need to do is allocate a percentage of your income each month so that it gets invested without your fretting about it. TD Direct Investing makes this option easy for you. When you log in, visit the trading menu and select Regular Investing, it couldn’t be easier to do.

Not rich enough? Some people are deterred by the fact they aren’t able to make full use of the ISA allowance of £15,240 for this current tax year. Our view is that you shouldn’t worry about it; this figure is the maximum rather than the minimum that you can invest in this particular product. Look at your finances and invest as much as you can afford to. Anything you are able to invest will help. Invest early and invest regularly. It’s all about growing your assets over time using the power of compounding.

If you invested £1000 into UK stock market (as measured by FTSE All Share index) and contributed £100 monthly it could have grown to £52,985 after 20 years.

The FTSE All Share returned 16.8% in 2016 and 6.73% per annum (annualised) over 20 years.

Investing £1,000 vs holding cash

How cash compares to investing in the market
Time period: 1 January 1997 to 31 December 2016
Source: Morningstar Direct

Past performance is not a reliable indicator of future returns

For ideas for your ISA click here.

Britain will change over the next two years

With Article 50 looking likely to be triggered in March this year, Britain will once again have to adapt to being an island both literally and metaphorically. It’s important to be ready for change. We are changing as people. Lifestyles in later life are very different from those of just a generation ago. We are seeking healthier pursuits and in many cases are investing in creating memories ahead of purchasing actual goods. It is essential to make sure you are positioned to make the most of these opportunities – this is why holding at least some cash in your portfolio is a good tactic.

At the same time 2017 looks like it will present a number of things for investors to consider, such as the Brexit effect, taking advantage of cyclicals, sustainable investing, emerging markets and, perhaps most importantly, holding your nerve. For more details take a look here.

Over the next two years, before Brexit becomes a reality, UK businesses will be going all out to make the most of their opportunities. You should be flexible enough to take advantage of these.

Focus on the things which are under your control and which will increase your wealth:

  • Save as much as you can each month 
  • Invest in and diversify across a range of proven fund managers you can trust (our Recommended Funds list is a good place to start)
  • Make your portfolio as tax efficient as possible by making the most of your pension and ISA allowances. Invest for your children in a Junior Isa.

As well as investing regularly it’s also good discipline to review your portfolio on a regular basis to ensure it still fits with your life goals, perhaps annually around this time of year ahead of the end of the financial year end and the spring budget announcements.

“Question yourself again on what your life goals are and whether you are adequately preparing for them.”

This is an incredibly important question – and needs to be taken seriously by you because the state isn’t going to be providing the support that it has for past generations. If you want to enjoy the quality of life you have now then you must plan and invest for the future.

You can use our pension calculator tool to work out what your post-retirement income might be.

Embrace the fact we’re living longer and plan for the future. We might one day be receiving a telegram from the Queen (or whatever the equivalent is by then – perhaps an Instagram message from King George). The earlier in life you get started with investing the better – it’s never too early or late to begin, even if you can only afford to put away a relatively small amount each month at first.

Investment opportunities for 2017

Important information

The tax treatment of these products does depend on your circumstances and might change.

The information we provide in this Investment Outlook are opinions provided by TD Direct Investing or one of its partners on whether to buy a specific investment. None of the opinions we provide are a personal recommendation, 

Investors should be aware that the value of investments can fall as well as rise, you may get back less than you invested. Past performance is not a reliable indicator of future returns.

If you are unsure about the suitability of a particular investment you should speak to a suitably qualified financial adviser.