This is the second in a series examining how young savers can invest towards goals such as buying a first home and building a retirement pot, highlighting the best stocks, funds and ethical funds for them to pick.
Investors in their 20s have time on their side. For many, an investment horizon spanning multiple decades means they can put their money to work in the search of the highest possible return.
It affords them the chance to capitalise on some of the biggest long-term trends affecting the global economy, like the rise of artificial intelligence, Asia’s economic ascent and shifts in the world’s demography.
That is, provided they pick the right investments to tap into those opportunities. For many, funds offer a gentler introduction to the world of investing than the stock market, offering pre-packaged portfolios of shares. But with more than 8,000 funds available to British investors, it can still be challenging to pick the right ones.
Daniel Chia, a 29-year-old dentist from Essex, started out by picking “tracker” funds, which mimic the returns of a particular market at low cost, when he began investing in the first lockdown last year.
“I had more time to myself and I didn’t know what to do with my excess income, so I gave it a go,” he said. “At first I went down the passive route, picking funds that track the market.”
Only later was he convinced to try “active” funds, which cost more, and are run by fund managers seeking to beat the market. “I started looking at other options, like the Baillie Gifford US Growth trust,” he said.
Shares in the £1bn investment trust, which holds some of America’s best-performing shares like Tesla, Amazon and Zoom, are up 145pc from their pandemic low. “That has been my best investment so far,” said Mr Chia.
Overall, Mr Chia’s portfolios, which still feature a large proportion of tracker funds, are up by around 15pc over the past year. He holds four funds tracking different American stock market across his Sipp and Lisa, and one, the Lyxor Cac 40 exchange-traded fund, mimicking the performance of French stocks.
Andy Merricks, of wealth manager 8am Global, said Mr Chia could supplement these with tracker funds targeting particular investment themes, which offered the potential of beating the broader stock market. He said this was a way of tapping into long-term technology trends such as the rise of cloud computing and artificial intelligence.
“Try to look forward and see what the world wants now, not what it has needed before,” he said, tipping the L&G Robo Global Robotics and Automation fund. “It tracks a basket of companies in the robotics and artificial intelligence sectors – that way investors can capture growth across a range of businesses,” he said.
Mr Merricks also pointed to the iShares Cybersecurity and Tech exchange-traded fund, which has delivered returns of 40pc over the past year.
Mr Chia said he was concerned how the funds in his portfolio would perform when stock markets fall. “I have been only investing for a little over a year, so I have not experienced a major dip in the market yet. I hope I would not panic, and I’m confident in my current picks, but you never know,” he added.
Chris Metcalfe, of asset manager Iboss, advised that “active” funds could better protect his portfolio in a stock market downturn. “Following the market’s momentum works until something bad happens,” he warned. “If your investments are too concentrated in one area then you can lose money very quickly if something goes wrong.”
He suggested Mr Chia add active funds investing in cheaper British shares to his portfolio. “British companies have faced several headwinds over recent years, including Brexit and the pandemic. But there are good value opportunities here,” he said.
Mr Metcalfe tipped the Artemis UK Select fund, which counts Barclays, Tesco and gambling giant Entain in its top 10 holdings. It has delivered returns of 38pc over the past three years, more than five times the 7pc from the FTSE All-Share, a barometer for Britain’s market. He also suggested the SVM UK Growth and Polar Capital UK Value Opportunities funds, which have returned 32pc and 21pc over the same period.
Investing in British stock market tracker funds could end up hurting young investors in the long run, warned Mr Metcalfe. “If you just track the UK market, you get very little exposure to growth sectors such as technology. Instead you get a disproportionate exposure to traditional sectors such as oil and gas, mining and banks.”
He recommended Octopus Micro Cap as a fund holding a more diverse array of British companies. It focuses on small firms with high growth potential, and has delivered returns of 68pc over the past three years.
A global approach helps when investing for the long term. Jack Liddiard, a 27 year-old software engineer from Newbury, holds more than a third of his portfolio in a global fund that gives him broad exposure to international markets.
So far Mr Liddiard, who created his portfolio with stockbroker Nutmeg three years ago, has generated a return of 16pc.
“It’s so much better than leaving to sit in a bank account” he said. “I used to scurry away money into a savings account. But now I top up my portfolio with around £500 a month, and leave it to grow over time.”
Mr Liddiard’s best-performing fund over the past year has been JPMorgan Global Research Enhanced Index Equity ESG, which has returned 36pc.
Looking beyond developed markets can help drive growth, said Ben Yearsley of Shore Financial Planning. “There are around 3.5 billion middle class people in the world and that will likely grow to 5.5 billion by the end of the decade. The majority of that growth will be in from Asia,” he said.
Mr Yearsley tipped the FSSA Asia Focus and the Fidelity China Consumer funds for investors looking to benefit from higher household spending in Asia. While the former has delivered returns of 20pc over the past year, the latter has suffered as China’s market has fallen, losing 14pc of its value.
For investors looking to tap into the rise of developing economies but concerned about China, Mr Metcalfe suggested the Somerset Emerging Markets Discovery fund, which holds relatively little of its assets in the country.
Mr Yearsley also pointed to changing demographics as a long-term trend that young investors can profit from. “A broad way to play this theme is through healthcare,” he said. “As the population ages, there is huge scope for growth in innovation for this sector.”
He tipped the Polar Global Healthcare Trust and the Biotech Growth Trust, which have returned 80pc and 54pc respectively over the past three years. Shares in the two investment trusts trade at respective discounts of 10pc and 7pc to their assets.
A long-term outlook can introduce exciting themes into young investors’ portfolios, but Mr Merricks warned it could often be hard to give them enough time to play out.
“A lot of young people make the mistake of chopping and changing too quickly. Don’t give up on your ideas straight away,” he said. “Try not to check your investments every day. If you’re investing with a horizon of 40 years, you don’t need to check your portfolio more than a few times a year.”
Mr Yearsley agreed. “If there is a major change in the outlook for a theme in your portfolio, such as tighter regulation, then that would be the time to look at it. But otherwise, keep at it and ignore the noise.”