There is certainly some truth to this. Anyone investing in a pension scheme has no chance of touching that capital until retirement – not without some hefty fees – therefore they are more likely to hold higher-growth assets such as emerging market or smaller company equities.
However, as well as having a longer term horizon, the majority of younger investors will not own a house and may be saving for a deposit, so holding a portfolio of equities represents a gamble for more short-term goals. Ben Willis (pictured), head of research at Whitechurch, says when it comes to constructing a portfolio and deciding upon asset allocation, it isn’t age that should be the principal driver, but the appetite for risk.
"Ultimately it all depends on your risk profile as to what drives your asset allocation. Some will look for a more diversified portfolio, which can be suitable as younger investors may want to preserve capital as well as making the most of attractive growth markets."
"When you have a longer time horizon you can usually afford to be more speculative, so you are going to be leaning towards equities. You can also afford to have exposure to long-term growth stories which could be global drivers over the coming years."
"However, it all depends on what objectives you have."
"If you are saving for a deposit, you aren’t going to be too speculative and you will want to maintain a relatively defensive nature as you are essentially building a nest egg."
"If you are putting that money into a pension, though, you aren’t going to be accessing it for around 40 years so you naturally take higher risk and then think about lowering that risk closer to your retirement date."
His thoughts are echoed by Jason Hollands, managing director of business development and communications at Bestinvest.
"It’s all about the duration, not your age per se," Hollands (pictured) said. "You many well be in your 20s or 30s, but if you have short or medium-term goals you won’t want to take too much risk. You may be saving to buy a house in three years’ time, but if you are predominantly holding equities and markets sell off, you may not be able to afford one."
Hollands says that if investors have a fairly short investment horizon, they should hold low-volatility assets.
"As much as I hate cash, because if you hold it for a long time you will see it eroding, for investors with a short-term horizon it does make sense to hold it," he said.
"If you want an investment portfolio, you are really looking at absolute-return style funds such as Standard Life GARS or potentially something like Insight Absolute Insight, as they are very low volatility funds."
"In the past you would go for bond funds but they are now very squeezed and the fixed income market could correct, so at the moment I wouldn’t be holding bonds for a short-term horizon," he added.
As FE Trustnet recently highlighted, both Standard Life GARS and Insight Absolute Insight have suited short-term investors in the past. Both funds use alternative investment strategies – such as taking long/short positions – to grind out returns over any given year.
According to FE Analytics, that compounding effect of annual returns means that both portfolios have made double-digit gains over the last five years.
Performance of funds vs indices over 5-yrs
Source: FE Analytics
The graph also shows the UK consumer price index (CPI), which is the measure of inflation in the UK. Investors who bought the funds five years ago would have protected their capital from the rising cost of living far better than cash over that time.
While the FTSE All Share has outperformed the five crown-rated Insight Absolute Insight fund, it has been far more volatile, which obviously is not attractive for investors who do not want to take short-term risks.
How to think about risk
As mentioned earlier, investors who have a longer time horizon of three to five years should be looking for higher-growth options.
"In general, younger investors can afford to be fairly speculative and hold predominantly equities, although they might want to have fixed interest as a buffer, as it can dampen volatility and defend capital," Willis said.
"However, over time, equity prices have traditionally moved upwards and have been the best growth assets."
Hollands agrees with Willis, but says many investors are making a big mistake by being too defensive.
"Historically, the view has been that you should have your age in bonds – but I don’t agree with that anymore," he said.
"One of the reasons for that is retirement periods are a lot longer now. It used to be that you retired at 65 and then popped your clogs 10 years later. Thankfully now though we are all living a bit longer."
"One of the biggest mistakes investors have been making is de-risking too early. I think you should primarily be in equities until at least your mid-40s and then look to some lower-volatility assets."
"For instance, in my pension I have zero bonds," he said.
"The choice of funds depends really on how much you have to invest. I think the best starting point would be a globally diverse equity fund and then complement that with something higher risk like First State Global Emerging Markets, especially as it is about to soft-close."
Hollands also likes the compounding effect of reinvested dividends, so he says investors with a long-term horizon could look towards equity funds. While he likes UK equity income portfolios, he says investors should not limit themselves and should also look towards more globally focused funds.
Sample portfolio
There are many funds in the UK that could be combined to produce the type of portfolio Hollands and Willis recommend.
Hollands said using a global equity fund is the first starting point and one such option could be Rathbone Global Opportunities, run by FE Alpha Manager James Thomson.
We used the five crown-rated First State Global Emerging Market Leaders fund – which is run by Jonathan Asante and FE Alpha Manager Glen Finegan – and FE Alpha Manager Giles Hargreave’s five crown-rated Marlborough UK Micro Cap Growth fund to give the portfolio a kick.
Another higher-growth fund in the portfolio is FE Alpha Manager John McClure’s Unicorn Free Spirit, which has the ability to dip into any area of the UK equity market.
We also used the five crown-rated Newton Global Higher Income and Invesco Perpetual High Income so that investors could re-invest the income for higher growth.
For the purpose of this exercise, we have included FE Alpha Manager Ariel Bezalel’s Jupiter Strategic Bond fund, as he can invest anywhere across the fixed income market. The fund should also dampen overall volatility and de-correlate returns within the portfolio.
Although it is important to note past returns should not be used as a guide to future performance, that portfolio would have returned 59.66 per cent over the past five years, compared with 37.61 per cent from the FTSE All Share.
Performance of portfolio vs index over 5yrs
Source: FE Analytics
It has also been less volatile than the index over that time.
Obviously, this is an example and so investors may want to take a strong view on a particular sector, region or asset class by holding sector- or country-specific funds.
