This is the second part in a regular series in which we will provide an investment clinic based on hypothetical scenarios. By doing so we aim to provide some insights which can help different types of investor from beginners all the way up to experienced market participants.

After saving hard for the past 30 years, 50-year old retail manager Georgia has her mind set on buying a holiday home in Spain. Georgia has been binge watching overseas property TV show A Place in the Sun during lockdown and this has seeded the idea of buying aboard, perhaps a little more than five years from now.

She studied some Spanish years ago and while limited, her knowledge has been a real icebreaker with locals on trips to Spain in the past. It also means that Georgia is willing to consider properties away from the main tourist hotspots.

Ideally, she would like to own a townhouse or villa somewhere in Andalusia, southern Spain, with access by car or public transport to a decent sized town and the coast. Georgia loves the sherry region around Jerez, and the area around the port city of Cadiz.

FLEXIBLE ON PROPERTY CHOICE

But she is realistic enough to appreciate that her capital may not stretch that far and would consider an apartment complex somewhere in the greater Malaga region with its abundance of holiday homes, international airport and lower property prices.

Brexit has complicated matters, but Georgia is aware that there have been no changes to the process or cost of buying a property in Spain, although there are now restrictions on how long a UK resident can stay in Spain without a visa.

The property in Spain would initially be used for short breaks and longer holidays but possibly become a place to spend longer periods when she decides to  stop working.

With a company pension plan through her employer gradually building value for retirement and other savings invested in several funds through an ISA, she has laid the right kind of financial groundwork to put her plans into action despite having never bought individual stocks before.

Georgia currently has £65,000 for the project and she has seen promising properties advertised online for as little as £40,000. But she appreciates that her options would be far greater with a larger lump sum, especially with if any work was needed to spruce up the place. There will also be various fees and taxes to pay and running costs for when she is not there, which all need to be factored in.

Nearer the time Georgia would benefit from taking some expert property and legal advice but in the meantime, the UK Government provides some useful guidance on legal matters, tax, the foreigners identification number (NIE) and lots more regarding Brits buying properties abroad, including Spain, here.

PUTTING CAPITAL TO WORK

To do this Georgia plans to invest her lump sum cash over the next five years and, hopefully, grow it to around £90,000. Fortunately this lump sum is already held within an ISA so Georgia can invest within the wrapper and shield herself from tax on her capital gains and income.

Given the threadbare state of savings rates and bond yields, investing in equity markets is a good option for Georgia if she hopes to get the average 7% or so yearly return needed to hit her target.

This total return objective is within reach; the FTSE 100 has given investors a 6.85% annual average return over the past five years, according to Morningstar data, despite the Brexit hangover for UK equity markets, largely thanks to the hefty dividends paid.

Georgia should note that UK payouts have come under extreme pressure during the Covid pandemic and many were cut or axed last year. While this is likely to be a temporary belt-tightening measure for many companies, there is no guarantee that shareholder payouts will be as generous over the coming  five years.

Sticking to funds, where she has some experience and can get some level of ready-made diversification at a stroke, would make sense. There is undoubted underlying recovery potential in the UK equity markets but Georgia may also benefit from greater exposure to large-cap growth stocks than the UK alone can provide.

The US has enjoyed some of the fastest growth in recent years and with billions of stimulus dollars being made available to support the economy, experts largely predict further growth for the US in the foreseeable future.

One way to access this potential could be a low-cost US tracker fund or ETF, such as the Vanguard S&P 500 ETF (VUSA). It effectively looks to match the performance of the S&P 500 index by buying the underlying stocks, including many familiar names like Apple, Amazon, Coca-Cola, McDonald’s and Nike. With a 0.07% ongoing cost, it is very cost efficient.

Winding down risk exposure

As she gets closer to realising her dream of owning property abroad, Georgia may need to start reducing her exposure to equities to avoid being caught out by short-term market volatility either by moving into cash or less volatile assets like bond funds.

LOW-COST ETFS A USEFUL OPTION

Similarly, the Invesco EQQQ Nasdaq 100 ETF (EQQQ) or Lyxor Nasdaq 100 ETF (NASL) track the technology-led Nasdaq 100 index, which would provide a more concentrated growth option. Either of these funds, or something similar, could make a sensible additional option for Georgia to spread her capital across, giving her access to some of the fastest-growing tech stocks in the world, such as PayPal, Nvidia and Zoom Communications.

There is also plenty of optimism about growth potential emerging from China and the Far East in the next few years. Many experts believe that China will dominate global growth over the next decade as it continues to push ahead with its massive transition into a consumer-based economic superpower.

While the Covid-19 virus wreaked havoc in China last year, like everywhere else, the country has been quick to recover, impressing fund managers. ‘China is back to normal in so many sectors,’ said Dale Nicholls, who runs the Fidelity China Special Situations (FCSS) investment trust. Even some of the hardest hit industries, like travel, hotels and restaurants are recovering rapidly, the fund manager said.

ETFs could work here too, although investing in a specialist fund like Fidelity China would allow Georgia to benefit from rapid economic and share price growth in the region, but with the help and expertise of Fidelity’s team of stock pickers.

Fidelity China Special Situations has an exceptional track record, beating its Asia-Pacific sector over three and five-year periods, with the latter’s 278% return almost double the benchmark.

Alternative fund options for China exposure might be Baillie Gifford China (B3K73F7) and Pictet Greater China (B96TPL9). Both Baillie Gifford and Pictet are rated highly by investors thanks to their focus on longer-run growth and strong value creation records, although there is a huge selection for Georgia to choose from.

DISCLAIMER. This article is based on a fictional situation to provide an example of how someone might approach investing. It is not a personal recommendation. It is important to do your research and understand the risks before investing.

DISCLAIMER: The author owns shares in Baillie Gifford China.

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