James Venning, 28, from Richmond, London, wants his finances to be a bit more exciting. The senior assistant buyer for a major high street fashion retailer has a stable income, savings and even a pension, but after dabbling with a few hundred pounds-worth of stocks and shares, is now keen to develop his investment portfolio.
"I'm really trying to find out about interesting things to do with my investments," James says. "I've a few bits and pieces that I play around with and find the experience rewarding. I enjoy the process, including hearing friends' tips and researching the companies involved.
"I know I should be clearing my debts and I'm working towards that goal, but I'd really like some ideas about how to take my investments up a notch for the short and medium term," James says. "Then there's the question of getting on the property ladder at some stage."
James has clearly enjoyed the thrill and discipline of researching and investing in the stock market, and by taking an active interest in his money now is creating a positive habit for the rest of his life, our panel agrees. But he also knows he should be addressing the less interesting priorities of repaying the £8,000 he borrowed to buy a motorbike last year and keeping his current account in credit every month.
"James really shouldn't be getting overdrawn every month," warns A J Somal, an independent financial adviser with Uniec Financial Solutions. "He must reduce his monthly outgoings to pay off his loan, build up his current account balance, and have an adequate emergency fund. Saving money on utility bills, cutting back on going out, and even not going on holiday this year, will enable James to improve his current account balance. Because James rents his property, he could also consider renting in a less expensive area to further cut his costs."
"Overall, James is in a reasonable position for his age, but he risks falling into the trap of not managing his debt," says Danny Cox, an independent financial adviser for Hargreaves Lansdown. "Repaying debt is probably the best investment James could make, and in the long term he will profit by not having to repay so much interest."
James is currently paying 7.9 per cent interest on his loan with Lloyd's. This means the investments he has will have to produce a return of at least 7.9 per cent, after taking into account charges and tax, to match the interest on the loan – worth around £1,840 over the loan's duration.
"If the return from his investments is lower, the loan is costing him more than he is making," says Mr Cox. "But for this arrangement to work, the investments have to give him a profit over and above the cost by a margin, to allow for the extra risk he is taking."
The most sensible course of action for James would be to cash in all his non-ISA savings and investments – worth around £6,500 – to go towards paying off his loan. Elsewhere, the £50 James pays into an equity ISA every month, currently worth £350, would be better used to prop up his current account, improve his access to everyday money and help him avoid going overdrawn, when he is likely to be charged fees and high interest rates.
James has approximately £4,000 invested in Jupiter's Financial Opportunities Fund, and around £2,500 he has directly invested in shares in BAE Systems, GlaxoSmithKline, William Hill, 3i Group and Max Petroleum. He has a further £2,500 currently in a Lloyd's savings account, which he's keen to invest in China or India.
"James's investments are quite high-risk," says Adrian Lowcock, an independent financial adviser for Bestinvest. "His major investment is in a managed fund in Jupiter Financial Opportunities Fund, which has done well to weather the financial storm and given good returns over the past year."
While James has made the right choice in terms of picking a fund, as opposed to individual bank shares, he is invested in a specialist fund which can be volatile, particularly given recent events. Meanwhile, the investments in individual shares are small and share-dealing charges will impact upon the money he earns through the performance of those.
"Investing in individual companies can be higher risk and the value will be more volatile. I would suggest selling these holdings and moving them into a managed fund," Mr Lowcock says. "The Threadneedle Global Select Fund, for example, something that could act as a base for a diversified portfolio. And given ISA allowances rise to £10,200 in the 2010-11 tax year, James can put this into an ISA."
James is also considering investing another £2,500 into China or India. Both represent exciting opportunities, but this would leave him with a portfolio of equity investments which is higher risk, the advisers warn.
"Considering the objectives and timescale, I would suggest a more balanced approach to investing, using some of the money to invest in a broader Asia Pacific fund such as First State Asia Pacific Leaders," Mr Lowcock suggests. "James can invest the rest in a strategic bond fund such as Invesco Perpetual Tactical Bond, and because he is happy to embrace quite high risks, I would recommend the Aberdeen Emerging Markets Fund. This would create a diversified portfolio, give James the exposure he is looking for but at a much lower level of risk."
James should consider using a fund supermarket rather than investing directly with a single company. This will give him access to a much wider range of funds and shares in one account, including funds such as the Jupiter Financial Opportunities Fund that he already invests in.
James has started saving for his pension in his early twenties, and contributes about 3 per cent of his salary to his retirement fund, matched by his employer. But his plans to stop work are still unachievable, Mr Somal warns.
His current level of pension savings could give him an income of £8,200 a year in today's terms at age 65, assuming his investment grows by 6 per cent a year, with an annual inflation of about 2.5 per cent. If James were to retire at 55, his income reduces to £4,200 a year. But, if he could increase his contributions to 4 per cent, James could retire at 65 on around £9,600 in today's terms.
"James should maintain his pension contributions into his employer pension scheme, but expecting £30,000 per year at age 65 from his pension is completely unrealistic," he says. "James may have to reassess his retirement plans, and may even need to put back his retirement age to a later date."
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