Yahoo Finance 'Fundsmith will pay for my first home': how to invest your way onto the property ladder
This is the first 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.
As house prices across the country continue their steady march upwards, the prospect of buying a place to live inches further away for many young people.
But the dream is still not dead: two-thirds of prospective buyers said they were now more motivated than ever to get onto the property ladder, according to a recent survey conducted by Aldermore Bank.
To turn that dream into a reality, young savers hoping to build a deposit are shunning the paltry rates on offer from cash savings accounts and turning to the stock market.
Teleri Evans, a 28 year-old student from Bristol, had been diligently saving for her first home in a cash Isa and savings account, until she learned from a friend of the returns she could make on the stock market.
Five years on, she has made 34pc, growing her deposit savings to £37,000, by investing in a portfolio of funds held in a Lifetime Isa. “It is just not comparable to what I would have been able to make in a savings account,” she said.
Miss Evans has contributed the maximum £4,000 allowed into her Lisa every year since 2015, in turn benefiting from the maximum £1,000 Government top-up, or 25pc of the amount invested.
She has invested the money in funds which buy shares in companies from all over the world. “I wanted my portfolio to be as geographically diverse as possible,” she said. “So that way I could get exposure to growth everywhere. I’ve got funds in Britain, Europe, Asia and Latin America,” she said.
The best performer so far has been Fundsmith Equity, which has returned 120pc over the past five years. The £28bn fund, run by star manager Terry Smith, focuses on high-quality international companies such as payments processor PayPal, software giant Microsoft, and cosmetics firms Estée Lauder and L’Oréal.
Now, however, Miss Evans has moved nearly a third of the portfolio into cash, as a recent career change has changed her attitude to risk. She left her job as a surveyor to starts training as a teacher this month.
“I am studying to be a teacher, and I don’t yet know what my exact salary will be when I get a job. I am trying to cut back on risk, and have now moved around £11,000 out of the portfolio back into cash savings,” she said.
Sarah Coles, of fund shop Hargreaves Lansdown, said savers under 40 – the age limit for opening a Lisa – should consider the government savings scheme as a means of getting onto the property ladder.
She warned investing for a deposit wasn't appropriate for those looking to buy imminently, adding that Lisa savers would pay a penalty if they accessed the funds for anything other than a house deposit, retirement or a terminal illness. “But for first time buyers it is a brilliant leg-up onto the property ladder,” she said.
Investing in funds has also helped Jordan Bedford, a 24 year-old marketing professional from Surrey, on his way to a deposit for a first home.
He has now grown his stocks and shares Lisa to £30,000. “I want to build my deposit pot to £35,000 so I can buy a nice house somewhere outside London,” he said.
While his job is based in London, sky-high house prices have prompted Mr Bedford to consider buying a property in Nottingham or Rugby, where average house prices range from £237,000 to £274,000.
Mr Bedford described himself as a novice investor – but so far his early picks have delivered. His funds have returned on average 15pc over the past three years, compared with 7pc from the FTSE All-Share, a barometer for the British stock market. Fidelity Global Special Situations has been his best performer, returning 28pc.
Dzmitry Lipski, of Interactive Investor, said global stocks funds – like Fundsmith Equity and Fidelity Global Special Situations – were good options for those investing over the long term to buy a house.
He suggested Britain’s oldest investment trust, F&C, as a strong pick. “It offers a globally diversified portfolio of predominantly large companies that operate in well-established markets,” he said.
“It also has some exposure to privately-owned companies, which will hopefully boost performance. Combined with the manager’s long-term investment perspective, this makes it a good option for investors.”
Mr Lipski also pointed to the Vanguard LifeStrategy and BMO Sustainable Universal MAP funds. Both these fund ranges feature portfolios with differing proportions invested in shares. The more shares they hold, the riskier they are.
“For a five-year view and a balanced risk profile, the Vanguard LifeStrategy 60pc Equity fund, which holds 60pc of its portfolio in shares, or the BMO Sustainable Universal MAP Balanced fund, could be good options,” he said.
While global, growth-focused funds often deliver the highest returns, it is worth making sure there are varied styles within your portfolio, said Jason Hollands of wealth manager Tilney.
“If you have a medium-term view, investing for, say, five years, a defensive investment strategy is worth considering,” he said, suggesting the Ninety One Diversified Income fund. “It investing in a variety of assets and targets steady returns – aiming to yield 4pc – but seeks to limit losses,” he said.
For those who will be investing for more than five years, Mr Hollands suggested the Trojan Income fund. “It invests across blue-chip equities, inflation-linked bonds and gold, with the goal of delivering inflation-beating returns but with an emphasis on preserving the value of your investment,” he said.
“This fund will not blow the lights out in a strong market, but it won’t give you sleepless nights either,” he added.
Myron Jobson, of stockbroker Interactive Investor, added that those investing to buy a house should consider investing regularly, and, like Miss Evans, change their portfolio as their circumstances changed.
“It is good practice to invest regularly to get in the habit,” he said. “Drip feed investments monthly to help smooth out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging,” he said.
“As the time when you want to buy approaches, you should start gradually moving your investments over to cash. This will ensure that market movements at the eleventh hour don’t derail your plans.”
