Investment diversification

Your wealth might be maximised by doing pension first, on the pure maths of it alone. But for a lot of families, getting the mortgage down to an acceptable level to allow for flexibility of leave/workforce breaks might enhance your quality of life more in your young family years versus during your retirement years. It is never just black and white.

I think people should realise they can split your excess cash between the two, it doesn't have to be an all or nothing decision.

misemoi said:

But for a lot of families, getting the mortgage down to an acceptable level to allow for flexibility of leave/workforce breaks might enhance your quality of life more in your young family years versus during your retirement years.

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This is the point I am trying to make.

It is not just about maximising the return at the expense of all else, it is about maximising the flexibility while still getting a good return.

I have seen many cases of deep mortgage arrears where the bank could not come up with a sustainable solution. Had the mortgage been lower or had there been positive equity, a solution could have been offered.

Over the next twenty or thirty years, there will be a few busts where mortgage arrears will become a problem again. In those cases, people with 50% LTVs will be a lot better off than those with higher LTVs but better funded pensions. And those with lower LTVs will get lower mortgage rates as well.

For the avoidance of doubt, I’m very much in favour of paying down a mortgage ahead of schedule where possible.

I just don’t think that should be prioritised over adequately funding a pension.

A common scenario that we come across on AAM is somebody in mid/late career with a paid off home but with pitiful retirement savings.

That’s not a good result.

Itchy said:

Your actual portfolio is Cash: 52%, Pension: 28%, Investments: 21%. 101%! (Rounding i'm sure

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Hey Mayo.
Ideally for me, if I was <10 years from retirement I would want my mix to be closer to
Cash: 15%, Pension: 50%, Investments: 35%.

The main thing for you do now is to max out the pension contributions (for both pensions). If this means you have to drawdown some of your cash, so be it. It's tax efficient anyway, so your future self will thank you.

After you're confident that you are maxing your pension contributions and making sure that you are leaving enough cash for 1 years worth of expenses, then you might consider moving some cash to increase your investments to roughly 35%.
Keep it simple, so if you are a DIYer, something like (Berkshire 28%, F&C Investment Trust 30%, JPMorgan Global Growth & Income Trust 30%, Other individual stocks 5%, Gold 7%). Or if not a DIYer, Pick a global index tracker with a Life company

I would tend to be an advocate of paying off the mortgage asap. Paid mine off in 4 years. Relentless focus, and now I am an investor as a result of needing a new focus. There is more to money than raw mathematics.

On post #23 above:

Why has the person pitiful savings? Your home is an asset in the sense that you would otherwise have to pay rental for shelter. When you pay off your mortgage or reduce it to an acceptable level, this frees up a stream of income you can now use to make additional payments to your pension / investments. Or even build up cash savings, in situations where there is an elevated risk of unemployment. Your house is an illiquid asset that provides a notional annuity through the opportunity cost of renting and/or the savings from mortgage payments.

Again, I’ve no issue with paying down a mortgage ahead of schedule. In fact, I’m very much in favour of it.

But I don’t think that should be prioritised over adequately funding a pension.

There are annual limits that apply to the tax-relief on pension contributions. There is no mechanism to make “catch up” contributions. If you don’t avail of the relief in any given year, it’s gone for good.

Thanks everyone for the replies and the debate it provoked (I take the constructive criticism in the benevolent sense it's meant!).

I s'pose my OP might have, to the chagrin of Brendan, conveyed the misleading impression that AAM experts were advocating paying off ones mortgage above all else as an investment strategy. I accept that is not the case and I took on board the importance of prioritising reducing and ultimately eliminating the mortgage along with pension investment over other investment decisions. Hence I guess part of the reason I have ended up with an excessive cash pile as opposed to more diversified investments. I have maximised my AVC contributions for recent years progressively up from up from 10% (when I was paying full whack on the mortgage) through 50% of the maximum up to the present maximum. AFAIK I'm not permitted to add any more lump sums of backdated payments to our pension funds. That has led me into dipping my toes in stock investment in the last couple of years (from the time when I had the mortgage payment reduced to an inconsequential amount) and it's been a tentative learning experience, hence the reason its a gradual process of transfer of diversification.

Regarding the cash and the gold. I suppose that approach has grown out of my disaffection and disgust of banks over the last decade or more. I'm mindful of Ugolin in Manon of the Springs hoarding his gold sous in the pot under the earthen floor. I guess (without subscribing to the alt conspiracy theorists too much) the concept of having a portion of physical wealth in the form of gold if everything else collapses into mistrust (considering events in the last month in the US not a totally unlikely prospect I think) appeals to me somewhat. Incidently my gold and cash aren't hidden under the floor or in the mattress!

In addition to the AVC's we're lucky to also have the prospect of occupational pensions and the contributary state pension at 66 along with thanks to the UK pension thread, a full UK contributary OAP for me at 67, so I'm pretty happy about the level of provision I've made for the future .

Anyway, thanks to the insights offered here I shall continue to diversify further into stocks and equities over the coming year. Perhaps I'll report back in a year or so on how it's gone.