60-year investment: asset allocation thoughts?

FatherAbraham

I'm putting together a portfolio for a four-year-old child, using a pension wrapper. This means that the investment horizon will be between fifty and seventy years, which is longer than most discussions of this topic consider.

I wondered whether anyone had good ideas, with reasoning, for the asset classes which such a portfolio should hold, at this point?

Thanks in advance for your reasoned ideas!
FA

bigadaj

Interesting projection.

Not sure how reasoned this can be as it is so speculative.

Simplistically I suppose we're looking at where te world might be in twenty, forty and sixty years. The consistent theme is the growth of Asia and other currently emerging markets, though growth in an economy doesn't necessarily translate as good investment returns.

Equities would assume to our perform over such a timescale, though in the shorter term many seem keen on government debt in emerging economies, something I mean to look ata. Little more.

It's going to be difficult to come up with a strategy now for such a period and consistent review every couple of years will be necessary, your investing for a time period which looking back would have taken us just after the Second World War.

One area I'm going to look at in more detail is turkey, as I think they have the potential for real economic power. Not just the country, big and with a. Arge population, but also a connection between Europe and the Arab world, and also an ethnic connection through Central Asia right not china.

I think your probably a more experienced investor than I am but a few speculative thoughts for discussion, constant monitoring and a flxexible started may be the most important factor.

bowlhead99

Long long term, the traditional view is that equities beat everything else because you are putting your capital 'to work' inside a trading business and benefitting from the profitable returns of a growing economy over time. If you demand any kind of fixed return from the company (ie a loan, debt or bond investment), this will generally be restricted in how much of their business returns they will let you take, because their goal is to run the enterprise in the interests of the shareholders. So your goal is to be a shareholder.

Clearly not all businesses are successful which is why you should hold a lot of them to diversify risk. And as you should want to hold businesses in all parts of the world, in all industries (as you have no knowledge that a particular world economy or business sector will perform better than the others), you are going to need to use funds rather than individual instruments.

So putting that together, you are definitely looking at equities-based funds. Is this pension going to be funded over the next few years until the child has its own income, or is it a one-off lump sum being invested at today's prices? The answer might change depending on this, as some sectors are relatively more expensive than others or than they might be in a year or two; you might look for a different level of risk on a one-off investment today than if you were simply looking to split an annual 3k investment for the next 10 years into rough percentages between classes to invest year after year.

As a broad plan for ongoing investment over a long timescale I would want some in general global largecap equities, which represent the vast majority of the world's publicly investible market cap (and to which good exposure could probably be achieved with cheap trackers), global smaller companies and a significant chunk in emerging markets. The best drivers of growth are not all public companies so I would also have an allocation to private equity and venture capital, through investment trusts.

If the above covered most areas of the world economy I would then look at themes that are likely to be relevant going forward, to give some bias one way or another in terms of particular sectors that would do well on a 30 year view - perhaps the recently hammered 'natural resources' sector, together with areas such as healthcare, technology would be worth considering, rather than more boring utilities and infrastructure which are more defensive. The latter could be useful from current market levels but has lower growth prospects for new money being put in during a typical year.

And having said equities are what you should focus on for a 50 year view, the world moves in cycles and it is sensible to have some small allocation to other assets which are less correlated with the main markets - such as bonds or real estate. This way when the equities become 99% of your portfolio during a huge equities bubble, you can sell some of them off to get back to 10-15% non-equities and cash in those profits... until the non equities then grow to 25% of the portfolio and it's time to rebalance back to relatively more attractive equities.

As a side note, I'm curious why you are looking to use the child's pension wrapper and lock it up for 50 years+, rather than say, your own pension wrapper which is locked up for less, or the child's JISA wrapper. Are those wrappers exhausted? The child is presumably not a high rate taxpayer at the moment so you are getting basic rate tax relief now while the child may be a basic or higher rate taxpayer in retirement and the level of 'lifetime allowance' or tax free lump sum rate which will be available in 2060-2080 is unknown. Alternatively if child is only basic rate taxpayer they would not have any tax to pay on dividends and a large annual CGT exemption so perhaps a wrapper of any kind is less necessary, and bare trust could work.

Totton

For such a lengthy time period I would be inclined to simply purchase a small number of Investment Trusts such as RIT Capital Partners, Personal Assets and Scottish Mortgage or similar. A simple fire and forget strategy whereas asset allocation would require tinkering to manage rebalancing.

Regards,
Mickey

kidmugsy

It would be tempting to mimic the investments of a perpetual corporation. Perhaps you could google around to see whether any of the Oxbridge colleges, for instance, publish details of their investments. However, their investments may often come in lumps too big to be copied, in which case a few Investment Trusts that have already existed for more than a century might be a decent fallback. Many of the ITs that would appeal to me are based in Edinburgh so you may care to let the Scottish Referendum occur before you take a plunge.

BLB53

As others have suggested, definitely equities for the long term. Crucial to keep costs to a minimum and also to reinvest dividends to turbo charge and compound the long term returns.

I like investment trusts so I would be looking at smaller companies - maybe one UK eg Aberforth and one global, also a couple of investment trusts like Murray International, Temple Bar, Bankers.

Here's a bit from Bankers latest annual report -

"A global equity fund such as Bankers is therefore well placed to offer an attractive investment for people saving for their future. £1,000 invested 30 years ago with all dividends re-invested would today have a value of £38,951. This compares with the return from cash invested in a bank deposit account with interest over that same period of £4,145. These are difficult times for savers, as cash deposits carry negative real interest rates; whereas there are real merits of investing in a savings product offering such as Bankers. It has a superior track record of long-term capital growth and increasing dividends in real terms. The above figures showing the comparison of returns over 30 years speak for themselves."

Would not bother with commodities, gold, or bonds.

Finally, will you be drip feeding or one-off lump sum?

My two penn'orth fwiw!

Ark_Welder

As per bowlhead99: a core of large-cap equities, and satellites of small-cap and PE/VC.

If bonds are to be considered at this stage then I would restrict them to the inflation-linked variety: even though many of these will return less than inflation if bought now, they still ought to provide a level of protection on this front as well as being diversification from equities. US TIPS have the advantage of having a floor to their redemption price, so could provide a positive return even if deflation should occur - not sure how easy it is (or whether it's possible) for UK citizens to hold these directly. As well as the possibility of individual holdings of IL gilts there are OEICs in the global bonds sector that hold international IL bonds. I would normally avoid bond ETFs like the plague because their holdings are constantly being replaced with newer issues with their current coupons, with the potential of an intervening fall in price when interest rates do start to rise, before rising again as redemption approaches. But holding IL bonds for a 50-60 year timescale might be an occasion where I would think on it again.

MoneySaverLog

Through compounding a £50 investment into a pension at age 0 in 60 years at an average of 12% a year is going to return a pension pot of just over £4.5 million. Whilst the kids are not working it's a really clever idea to start it early.

Picking the right investments are going to be key though, as would inflation over the period would mean that you wont get the same value for your money in 60 years times this could be somewhat mitigated by increasing the payments into the pension inline with the inflation rate.

bigadaj

I'm not convinced by the large cap approach.

Has anyone reviewed an investment strategy from say the mid fifties to today for comparison?

Ark_Welder

bigadaj wrote: »

I'm not convinced by the large cap approach.

Has anyone reviewed a Ismaili strategy from say the mid fifties to today for comparison?

Large cap offer a level of relative security to counterbalance the small cap and PE/VC holdings. Plus, EMs do have large cap companies.

anoncol

I honestly dont see the point of this. The money markets will be so different by the time it matures, and this baby will be well in control of their finances by then anyway it almost sounds insignificant.