However, as you move closer to the end of your working life, you need to re-evaluate your goals and objectives to ensure the high-growth funds you picked earlier are still doing the job. However Andy Merricks (pictured), head of investments at Skerritt Consultants, says the biggest mistake many investors make as they get older is scaling risk back too soon.
"I think people get too cautious too early," he said. "People are coming out of equities and equity income too soon."
"If you’re still around the age of 50, you’re still looking at a 10-year investment horizon or more."
It is very likely that the funds you bought years ago will continue to form part of your portfolio, in keeping with the long-term theme.
Merricks says some of the best core holdings for any investor are equity income funds, because they offer both the upside of equities and the added compounding benefit of reinvesting dividends.
"Do not underestimate the importance of reinvesting dividends," he stressed.
"But you don’t want to invest and just leave it. You need to keep your eye on the ball and be aware of where you’re investing," he added.
Merricks says that while portfolios are often broken down by asset class – such as equities and bonds – he adds that investors need to go into more detail and think about investing across the market cap scale.
He points out that an investor can have equity exposure, but it would be more aggressive if most of their assets were in small caps, while a more large cap focused portfolio would be more stable.
While Merricks says the asset breakdown varies from investor to investor depending on their appetite to risk and short-, medium- and long-term goals, he says a balanced investor should typically have about 30 per cent in bonds at any one time.
"It depends on your outlook. You want a good mix of equities, bonds and cash. Be sensible about what your goals are," he said.
He recommends that for a portfolio of £100,000, you should hold a minimum of 5 per cent in each fund so that it can make a meaningful contribution to your portfolio, but no more than 10 per cent, in order to protect against being caught out if that product takes a dive.
Merricks adds that investors often underestimate the need for cash reserves. Even in this low interest rate environment, he recommends holding back more cash than you think you need for short-term goals and emergencies.
"Usually when we have clients come in they’re doing something on the house or going on a holiday. I’d tell them to take whatever amount you think you’ll need and double it," he said.
"It is easier to add to a portfolio than realise you don’t have enough and have to take from it."
"Everyone needs some cash but you don’t want too much at the moment. You should be more cautious and add to your portfolio if you want to later."
For investors looking to build a more balanced portfolio as they move closer to retirement, Merricks says client and model portfolios at Skerritts are built around a core of equity income and bonds.
Two funds he favours in this space are the Temple Bar IT and Invesco Monthly Income Plus.
Temple Bar is headed up by star contrarian manager Alastair Mundy (pictured) and has been a standout performer in the IT UK Growth & Income sector over one, three, five and 10 years.
Over the last decade, the trust has made 241.95 per cent, beating the sector and FTSE All Share, which are up 156.44 per cent and 138.38 per cent respectively.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
It achieved this outperformance with a yield of 3.18 per cent.
Temple Bar IT is trading on a discount of 1.8 per cent and is 2 per cent geared. It has ongoing charges of just 0.51 per cent, according to the AIC.
For a core bond exposure mixed with the growth potential of equities, Merricks likes the Invesco Perpetual Monthly Income Plus fund, managed by FE Alpha Manager Neil Woodford and fixed income experts Paul Causer and Paul Read.
The £3.7bn Invesco fund has consistently beaten the IMA Sterling Strategic Bond sector since launch, and has more than doubled its returns over the last 10 years.
Performance of fund vs sector over 10 yrs
Source: FE Analytics
The fund requires a minimum investment of £500 and has ongoing charges of 1.43 per cent.
While Merricks says these funds make excellent long-term core holdings for investors in the middle to latter part of their career, it is important to be diversified and spread risk across different sectors, asset classes and regions.
He adds that he currently sees no value in core government bonds, such as gilts, Treasuries and Bunds, but has picked up some sovereign holdings in Europe, where he feels the reward is more worth the risk.
