By Chris Dillow , 16 April 2012
- Name John Cooper
- Age 47
- Description supplementary pension fund
- Objectives long term capital growth and reinvestment of dividends
Our reader, 47-year-old John Cooper has been investing since he was 17. His investment objective is to build a capital sum by long-term investment of both capital and reinvestment of dividends. He describes his investments as "partly a supplementary pension fund and partly a rainy day/comfort blanket fund to finance any life-style changes... or large purchases".
As a civil servant, he is a member of the final-salary pension scheme – he plans to retire in 2029 aged 65. He says: "Compared with most people I am financially in a very fortunate position. I am 47, single with no children and my only dependent is a cat. I am in secure full-time employment earning approximately £45,000 a year before tax."
His only liability is a mortgage of about £40,000 which he plans to pay off using some of his cash Isa and an endowment policy which will mature soon. Most of his shareholdings are in companies that offer drip schemes which he uses to reinvest his dividends. He does not like unit trusts/Oeics because of their charging structure.
John Cooper's Portfolio
|Investment||Shares/units held||Price (p)||Value (£)|
|Legal & General||14,370||124.2||17,847|
|Royal Dutch Shell 'B'||656||2,182||14,313|
|Marks & Spencer||3,121||371.3||11,588|
|British American Tobacco||288||3,128||9,008|
|Schroder UK Mid-Caps IT||2,700||259.25||6,999|
|Royal Dutch Shell 'A'||24||2,132||511|
|Total 120, 985|
Source: Investors Chronicle as at 13 April 2012.
Chris Dillow, Investors Chronicle's economist, says:
This is the sort of portfolio I expected and hoped to see when we started this readers' portfolio series. It's sufficiently diversified to spread equity risk, but not so much so as to be an over-diversified expensive closet tracker. And it has a clear stylistic tilt – towards defensives (the oil majors, GlaxoSmithKline, British American Tobacco and two utilities), leavened slightly by two high-beta banks. Given that there's evidence that defensives do well over the long run, there's a clear logic to this.
The portfolio does have some omissions, but these are defensible, for example:
■ It lacks direct exposure to overseas stocks. However, as UK shares are closely correlated with overseas ones, there is plenty of indirect exposure.
■ There are few obvious 'growth' stocks. But as corporate growth is largely unpredictable, this might not matter. A lot of so-called growth stocks have in fact been mere fashions.
■ Aside from the oil majors – which aren't very sensitive to oil prices – there are no commodity stocks. But you could easily take the view that commodity prices have been boosted by cheap and easy money and so have a lot of downside over coming months.
■ There is a lack of inflation protection. A protracted pay freeze in the public sector, allied to the possibility of a falling pound and/or higher than expected inflation, could depress your real income. Your portfolio probably doesn't offer much insurance against this. But then you could argue – with index-linked gilt yields around zero – that inflation protection is simply too expensive, especially as there's a good chance that inflation could eventually fall back to around 2 per cent.
Instead, I have other concerns.
One is that you say this portfolio is partly intended to "finance any lifestyle changes that may come along or large purchases I may wish to indulge". These are entirely reasonable goals, but I am not sure equities are the means for achieving them. There is a danger that your desire for a new car or kitchen might coincide with a period of low share prices. If this happens, you face the dilemma of either frustrating your consumption plans or selling shares at the wrong time. Personally, one reason why I hold cash is that it prevents me having to sell shares to finance big-ticket purchases.
However, you seem to be planning on reducing your cash holdings when you pay off your mortgage. From the point of view of maximising returns, this makes sense, as mortgage rates are higher than cash savings rates. But there is a trade-off between efficiency and flexibility. Holding less cash reduces the flexibility of both your consumption and investment plans.
All this said, I have another concern. Could it be that you are saving too much? If your equity portfolio grows by 5 per cent a year in real terms and annuity rates don't change, it will buy you an income of over £17,000 when you're 65. This will be on top of your final-salary pension and state pension, and it ignores any savings you make in the next 18 years. This raises the question; might you be saving too much and spending too little today in order to build a future income which is too high for your needs?
Yes, the conventional wisdom is that people save too little – a view that happily coincides with the self-interest of the financial services industry. But not everyone does this. There are, fundamentally, only two risks in personal finance – that you will outlive your wealth, or that your wealth will outlive you. Not many people, on their deathbeds, wish that they had saved more.
Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, says:
Congratulations on building a relatively solid financial position. It looks like you have acquired important virtues such as prudence, patience and self disciplineover many years.
Over your investing career, you have built cash reserves and a blue-chip share portfolio while your only liability in the form of a mortgage is soon to be paid off. You have used tax wrappers such as cash Isas , while your career in the civil service appears largely to have catered for your future pension arrangements.
Furthermore, you have firmly grasped the power of compounding income – a phenomenon that Albert Einstein once described as "the eighth wonder of the world", regularly reinvesting your dividend payments.
Interestingly, while more defensively perceived stocks such as Tesco and BP, and given company-specific events, have effectively trodden water, the most crisis impacted stock – Standard Chartered Bank – has enjoyed significant upside (over 120 per cent). On a broader basis, the FTSE 100 index has seen a 30 per cent plus recovery in its performance.
Turning to your portfolio, out of a total of 17 different investments held, four - or 23.5 per cent - are in the financial services arena. On a financial weighting basis, the two life assurance groups and two banks currently account for 29 per cent of the overall £125,180 portfolio. Sectors such as Food & Beverage, Engineering and Mining have all been excluded. Furthermore, while many of the companies held conduct business overseas, you hold no specific internationally focused investments .
However, your current watch list suggests that this situation appears to be under consideration. The Scottish Mortgage Investment Trust, with under 15 per cent of asset allocation UK related, provides a globally focused fund allowing the manager to decide on favoured geographical locations. Other funds such as the JPMorgan American or Jupiter European Opportunities Investment Trusts allow the investor to choose. Both have their place, with the size of the investor's portfolio and investing experience often the determinant as to which is used.
In all, while your portfolio requires some fine-tuning, you are moving towards your objectives.
|Schroder UK Mid-Caps Investment Trust||February 2011||Buy||HSBC|
|GSK||November 2008||Buy||Scottish Mortgage Investment Trust|
|BP||November 2008||Buy||JPMorgan American Investment Trust|
|Tesco||November 2008||Buy||Jupiter European Opportunities Investment Trust|