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I'm 26 live in the UK and do not own a home. I have a regular income of which I save about 33% off after tax and I've good job security. I'm single with no children. I've 60% of my savings in a P2P lending provider which allows me to sell my loans if I need the money. I've also 10% in regular saving accounts. I'd like to dip my toe in to stocks and after doing a little bit of research think I should invest in the IJR index fund. The money I've allocated is sitting in a 0% current account so I'm conscious I may be rushing in to this.

My attitude to risk is that it's not the end of the world if I lose some money if it gave me the opportunity for higher returns although it's possible I'd want to withdraw this money in 5-10 years for a deposit on a house which makes me more inclined to find a middle ground risk wise.

Should I invest in just one fund and does this match my attitude to risk? Is this a good starting point or do I need to slow down?

Ganesh Sittampalam
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Declan McKenna
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3 Answers3

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In a word, no.

Diversification is the first rule of investing. Your plan has poor diversification because it ignores most of the economy (large cap stocks). This means for the expected return your portfolio would get, you would bear an unnecessarily large amount of risk. Large cap and small cap stocks take turns outperforming each other. If you hold both, you have a safer portfolio because one will perform well while the other performs poorly. You will also likely want some exposure to the bond market.

A simple and diversified portfolio would be a total market index fund and a total bond market fund. Something like 60% in the equity and 40% in the bonds would be reasonable. You may also want international exposure and maybe exposure to real estate via a REIT fund.

You have expressed some risk-aversion in your post. The way to handle that is to take some of your money and keep it in your cash account and the rest into the diversified portfolio.

Remember, when people add more and more asset classes (large cap, international, bonds, etc.) they are not increasing the risk of their portfolio, they are reducing it via diversification. The way to reduce it even more (after you have diversified) is to keep a larger proportion of it in a savings account or other guaranteed investment.

BTW, your P2P lender investment seems like a great idea to me, but 60% of your money in it sounds like a lot.

farnsy
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If the OP is saving 33% if his/her current income, he/she doesn't want or need yet more income from investments right now. The advice on "diversifying" in the other answers is the standard "investment advisor" response to beginner's questions, and has two advantages for the advisor: (1) they won't get sued for giving bad advice and (2) they can make a nice fat commission selling you some very-average-performance products (and note they are selling you "investment industry products," not necessarily "good investment opportunities" - advisors get paid commission and bonuses for selling more stuff, not for selling good stuff).

My advice would be to drip-feed some of your excess income into the emerging market sector (maybe 1/3 or 1/4 of the excess), with the intention of leaving it there untouched for up to 20 or 30 years, if need be. At some unknown future time, it is almost certain there will be another EM "boom," if only because people have short memories. When that happens, sell up, take your profits, and do something less risky with them.

You might consider putting another slice of your excess income into the commodities sector. I don't know when the oil price will be back at $150 or $200 a barrel, but I would be happy to bet it will happen sometime in the OP's lifetime...

Since you apparently have plenty of income and are relatively young, that is the ideal time to adopt a risky investment strategy. Even if you lose your entire investment over the next 5 years, you still have another 20 years to recover from that disaster. If you were starting to invest at age 56 rather than 26, the risk/reward situation would be very different, of course.

alephzero
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Stock portfolios have diversifiable risk and undiversifiable risk. The market rewards investors for taking undiversifiable risk (e.g. owning an index of oil producing companies) and does not reward investors for assuming diversifiable risk (e.g. owning a single oil producing company). The market will not provide investors with any extra return for owning a single oil company when they can buy an oil index fund at no additional cost.

Similarly, the market will not reward you for owning a small-cap index fund when you can purchase a globally diversified / capitalization diversified index fund at no additional cost. This article provides a more detailed description.

The Vanguard Total World Stock Index Fund is a much better staring point for an equity portfolio.

You will need to make sure that the asset allocation of your overall portfolio (e.g. stocks, bonds, P2P lending, cash) is consistent with your time horizon (5-10 years).

Powers
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