stuart349734 wrote:My daughter is 30 and wants to start investing modest amounts into a Stocks and Shares ISA every year, with a view to not touching it until she retires in 35 years (or who knows when?) and would like me to choose her investments.
I've mainly invested in Investment Trusts for the past 25 years or so and whilst I've been pleased with the overall record, I'm trying to put myself in her position and think "what would I do if I was starting again?"
I've been investing long enough to realise that although there are many sound investment trusts, over the very long term, all are subject to market sentiment and with the best will in the world, I turn a bit of a blind eye to the inevitable periods of underperformance (or reversion to the mean?)
So I was thinking that for my daughter, or if I was starting again, my advice may be to use say, the Vanguard Lifestrategy 80% alone.
Without turning the discussion into an active vs passive bun-fight, I would be interested in people's views.
I would say the investment to choose would depend on your daughter's attitude to risk, which I appreciate is far from easy to determine. You only get a good feeling for it once asset values have dropped 50% or so. A single Lifestrategy fund of some sort would be a good option, especially for someone who does not want to think too much about the investment (nothing wrong with that). Personally, with an expected 35 year investment timescale, I would take on a lot more than 80% equity risk. So a Lifestrategy 100 or global tracker as others have suggested. But I would not stop there. ITs allow you to up the equity risk to more than 100% (because of gearing) and you can go overweight with higher risk areas, such as emerging markets, small caps and value stocks. So if it was just me, I would go for something like this to start with, then start slackening off on the risk in 15 years time:
Lifestrategy 100 or global tracker fund/ETF 30%
Vanguard Global Value Factor ETF 30%
Templeton Emerging Markets IT or iShares Core Emerging markets ETF 20%
Aberforth Smaller Companies Trust 20%
I really like the look of the Vanguard value ETF. As well as the tilt to value, it invests more evenly across stocks, so that it has an element of a small cap tilt as well. In addition the TER is low at 0.22% and dividends are automatically reinvested. Over an extended period the low cost, tilt to value and smaller caps give it a good, but not guaranteed, chance of beating an equivalent cap weighted world tracker.
Emerging markets are of course a lot more risky than developed markets, but over the long haul I would hope that the additional risk was compensated with higher returns. I have held Templeton EM for 26 years, and although I would not automatically recommend it these days over an ETF, right now and for a potential 35 year investment term, I think it has some merit due to the 14% discount to NAV. If/when that drops below 7% I would then flip to an ETF, unless the TER on Templeton EM dropped substantially.
UK smaller companies have taken a battering this year, mainly due to Brexit fears, but over the long term are likely to produce excellent returns (with considerable uncertainty and volatility of course). There are no small cap trackers* so ITs or OEICs are the only way to go unless you or your daughter wants to research and invest directly yourself. OEICs are IMHO problematic due to the illiquidity of small cap stocks, so ITs are the better choice. I have been looking into UK small cap ITs recently and the Aberforth would seem to me to be the optimal choice for a long term investment. It is trading on a 14% discount to NAV, can use gearing up to 20% and focuses on value. The value approach does mean more risk, but again this should be compensated risk.
One other thing. If the Lifetime ISA starts in April and is not otherwise crippled (e.g. with high charges), then it would seem highly appropriate to your daughters' requirements.
* Yes there are small cap trackers, but these tend to invest in FTSE 250 sized companies rather than FTSE small cap sized companies.