High equity exposure in my 70s

SUSAN SMITH'S PORTFOLIO

LAST THREE TRADES:

GKN, United Utilities and Fidessa.

SHARES OR FUNDS ON WATCHLIST:

John Menzies, N Brown (add), or an emerging market or small company investment trust.

Chris Dillow, Investors Chronicle's economist, says:

Unusually for someone of your age, this portfolio is entirely invested in equities. Is this wise?

Two things suggest it is. First, retired people don't have to worry about losing their job or business. This makes them better able than many working people to take on the economic risk which equities carry.

Secondly, in hoping to leave money to your children, you are in effect sharing the riskiness of this portfolio with them. This too increases your ability to bear risk.

On the other hand, though, your hefty exposure to shares poses the danger that if the market does fall you might have to cut your spending. In terms of probabilities, the risk here is large. I'd work on the assumption that there's a one-in-six chance of you losing 15 per cent or more over a 12-month period and a roughly one-in-four chance of you making a real loss of some sort over a five-year period.

However, you say that you're managing fine and reinvesting dividends now, which suggests that although the probability of a loss is high, its impact upon your standard of living might not be.

Granted, there is a risk that the market might fall at a time when you need to meet expensive care home bills. But this danger is small; the probability of you needing expensive care, multiplied by the probability of shares falling significantly, leaves us with a lowish probability.

These considerations make me sympathise with your belief that it is indeed a bad idea to put a lot of money into cash or bonds simply because of your age. This isn't just me; some great economic thinkers have also been sceptical of the idea that older folk should dump shares.

In fact, I'd go a little further. If you're managing to reinvest dividends, could it be that you are spending too little and depriving yourself unnecessarily? On a reasonably cautious view of expected returns, you can take 5 per cent out of this portfolio each year while leaving capital intact. Remember that it's possible to be recklessly conservative and to spend too little. Why not think about taking a holiday and build up some consumption capital - some happy memories to look back on in later years?

There is, though, one caveat here - inflation risk. There is a danger of a spurt in the cost of living which is not matched by a rise in your equity wealth. Although this danger is small in the near term, it can't be ruled out later in your life. The fact that the state pension is index-linked (or better) gives you some protection against this danger. But is this sufficient? If not, there's a case for shifting into index-linked gilts, despite their sky-high prices.

As for the composition of this portfolio, it's a well-diversified mix of defensives with a little high beta coming from emerging markets and commodity stocks. I suspect that, with 32 assets in it, it is a little over-diversified and unwieldy. This, though, is a secondary matter. The key question is whether one should be so heavily exposed to equities. If you're happy to bear this risk, then there's no problem here.

Ben Yearsley, head of investment research at Charles Stanley Direct, says:

It sounds as if you and your husband have got your heads relatively well screwed on when it comes to investing. You have most of your investments sheltered in the tax-efficient Isa wrapper, which is good whether you are looking for capital growth or want income. Income from an Isa is most beneficial for higher-rate tax payers. However, for pensioners it is useful as the Isa income doesn't reduce the additional personal allowance many pensioners receive.

When investing in a direct share portfolio two things are crucial: firstly, diversification; and secondly, time. A portfolio needs at least 20 stocks to provide some level of diversification while having one eye on the downside. Time is crucial, from the perspective of holding on to investments but also time to research prior to investing and monitoring once invested. You need to keep a much closer eye on a share portfolio than a unit trust portfolio.

I will point out one inconsistency in your comments: you mention a moderate attitude towards risk. Having a direct share portfolio is more than moderate risk. I do agree with your comments on bonds and cash - conceivably you may live for another 30 years, therefore you need real assets - ie, equities - to help keep pace with inflation.

Looking at the share portfolio first, there is a decent spread of companies and sectors, with many high dividend paying companies present.

I won't go through every stock, but highlight a few. On the positive front:

BP: The Deepwater Horizon liabilities are largely known thanks to settlement with the US Department of Justice back in November. The case for various civil damages remains outstanding but the share price implies a much greater adverse outcome than is considered likely.

Rio Tinto: The key to valuation is the amount of capital expenditure required to increase output capacity in the core Pilbara region (Western Australia). The share price is implying a much greater requirement there than many think likely, and while the hoped-for disposal of the diamond division isn't attracting much buyer interest, it's a relatively small influence on valuation.

On the negative front, I'd pick out Fidessa, which is badly exposed to City headcount reductions, which continue apace at many of the major investment banks.

On the dividend yielders front, BT, BAT and Vodafone all pay decent dividends.

Turning to your investment trusts, I cannot see the point of the Edinburgh UK tracker. There are plenty of good-quality active investments you could buy: Standard Life Equity Income, if you want to stick to investment trusts, or Lowland, managed by James Henderson of Henderson, who is a contrarian investor. The trust has had exceptional performance in recent years after a shocking 2008.

Aberdeen Asian Income is sitting on a large premium. I have absolutely nothing against you holding this as it is a quality investment buy. If the premium concerns you, you may wish to look at other options. Murray International, another Aberdeen managed fund, also sits on a large premium and you could switch into the Aberdeen World Growth & Income, managed to the same process by the same manager.

Monks has been a poor performer, as it is mainly in global mid-cap economically sensitive stocks. It is on a big-ish discount, but the manager is good and this is a long-term hold. It's a good time to buy more if you are a long-term owner.

Electra has money to invest but is looking for sensible valuations. A good management is in place. An initial public offering of eSure (which it owns part of) is probably on the cards.

Two investment trusts you might consider are Genesis, a broad emerging markets IT, and BlackRock UK Smaller Companies - as you have expressed an interest in both of these areas.

Overall, you have a good spread of investments. Your main decisions appear to be whether to take profits on some investment trusts and whether to switch out of trusts on large premiums.