In 2010, Janet and Alasdair invested money from the sale of their business in shares. The portfolio, partly held in self-invested personal pensions (Sipps) and individual savings accounts (Isas), is now worth almost £1.4m. The couple, both aged 49, aim to retire at age 55 on an income of £40,000 from this portfolio, made up of portfolio income and share sales as part of capital gains tax planning. They are medium risk, long-term investors and wish to trade infrequently. In addition to the portfolio they have buy-to-let residential property, substantial cash holdings and a mortgage-free home.
They say: "We expect to combine good income from some shares with some hopefully high capital gains. We have tried to get ahead of market trends and share price re-rating in housebuilders, commercial property and banks, and this seems to work well even if having to wait or suffering shorter-term price falls.
"The balance between income-producing shares and others for capital gains has particular reference to what will fall in 40 per cent tax bands. Letting dividends fall in the 20 per cent band with no further tax to pay is fine, but we don't want to pay 40 per cent income tax so capital gains opportunities become preferable."
Isa and Sipp
Retirement income
JANET AND ALASDAIR'S PORTFOLIO
| Holding | Value | % |
| Banks (22%) | ||
| Barclays | £46,000 | 3 |
| HSBC | £82,000 | 6 |
| Lloyds | £40,000 | 3 |
| Paragon | £18,000 | 1 |
| RBS | £39,000 | 3 |
| Standard Chartered | £64,000 | 5 |
| TSB | £12,000 | 1 |
| Retail/Other (17%) | ||
| Goals Soccer Centres | £44,000 | 3 |
| International Airlines Group | £33,000 | 2 |
| ITV | £55,000 | 4 |
| Tesco | £62,000 | 4.5 |
| WPP | £47,000 | 3.5 |
| Oil & Gas/Commodities (16.5%) | ||
| BlackRock World Mining Investment Trust | £48,000 | 3.5 |
| BP | £56,000 | 4 |
| Genel Energy | £85,000 | 6 |
| Glencore | £46,000 | 3 |
| Housebuilders (15%) | ||
| Barratt | £86,000 | 6 |
| Taylor Wimpey | £75,000 | 5 |
| Telford Homes | £57,000 | 4 |
| Commercial Property (13%) | ||
| Hansteen REIT | £48,000 | 3.5 |
| Helical Bar | £54,000 | 4 |
| Hibernia REIT | £15,000 | 1 |
| LondonMetric REIT | £61,000 | 4.5 |
| Emerging/Frontier (16.5%) | ||
| Aberdeen Asian Smaller Companies Investment Trust | £61,000 | 4.5 |
| BlackRock Frontiers Investment Trust | £93,000 | 7 |
| Templeton Emerging Markets Investment Trust | £68,000 | 5 |
| TOTAL | £1,395,000 | 100 |
OTHER INVESTMENTS
Buy-to-let residential property: £325,000
Five-year bank account bonds at 4.5 per cent: £650,000
Cash Isas: £175,000
Chris Dillow, the Investors Chronicle's economist, says:
With average luck, this portfolio should be more than sufficient to meet your objective of an income of £40,000 in six years' time. On the reasonable assumption that equities give a real total return of 5 per cent a year, you'll be able to get over £60,000 a year from this portfolio via capital gains and dividends, even if it doesn't grow at all in real terms in the next six years.
It is both correct and important to say that income can come from selling some shares as well as from dividends. Doing so isn't merely tax efficient, but also sensible from an investment perspective; the case for holding high-dividend stocks can only be that you might think them underpriced - not that dividends are attractive in their own right.
The fact that your portfolio looks like comfortably meeting your objectives poses the question: are you taking too much risk? Mightn't you want to lock in your future income by shifting to a less risky strategy?
And your equity holdings are indeed risky. Banks and housebuilders are high-beta stocks; if the market falls, they tend to fall more. And emerging markets carry crash risk; bad times for equities generally see emerging markets do especially badly.
Worse still, all these segments of the market are likely to be correlated on the downside. Commodity stocks tend to do badly when emerging markets do, and another global financial crisis would see banks and emerging markets fall together - with, probably, knock-on effects on housebuilders (these, remember, suffered horribly in the crisis of 2008-09).
However, what matters is not the riskiness of any segment of one's portfolio, but rather the risk of the entire portfolio. And you have two massive ways of spreading these risks: your huge cash holdings and your buy-to-let (BTL) investments; BTL is risky, but many of its risks are idiosyncratic (such as whether you'll always find a decent tenant) and so partially uncorrelated with equity risk. As equities account for less than 60 per cent of your total portfolio, the portfolio is less risky than many equity-heavy portfolios with lower-beta stocks.
Herein, though lies a problem. Why should a portfolio comprising lots of cash and high-beta stocks be better than one comprising less cash and more defensive stocks? Standard economic theory tells us the two should be the same.
There are, I suspect, two reasons to prefer your choice. One is that your equities might carry not just beta but alpha - some returns that are not related to general market returns. High-beta stocks carry benchmark risk - the danger of underperforming a falling market. Professional investors who are judged by relative returns want to avoid this, which means there might be a risk premium available for those investors like you who are able to take such risk.
Secondly, a high cash weighting makes sense, given that you've been able to lock in high returns on cash.
This second justification, though, might eventually disappear; your cash holdings are vulnerable to reinvestment risk - the danger that, when they mature, returns could be poor. If this happens, you might want to reduce your cash holdings. This, I suspect, would justify shifting towards more defensive stocks.
Here, though, you might be missing a trick. We have good evidence from around the world that defensive stocks (such as tobacco, utilities, beverages, food producers and some pharmaceuticals) on average do better than they should over the long term - perhaps because they carry the sort of benchmark risk that professionals want to avoid. And yet you have none of them. You might want to consider plugging this gap.
Amanda Tovey, investment manager and head of direct equity at Whitechurch Securities, says:
You state that you are medium-risk investors with 27 per cent of your overall portfolio in cash, 14 per cent in direct property (residential buy-to-let) and 59 per cent in UK equities.
The stated income requirement of £40,000 a year in retirement (in six years' time) equates to around 2.86 per cent on the current investment pot, which should be easily achievable with a small amount of restructuring.
To date you have built up a portfolio that has performed very well and your investment strategy of looking to get ahead of market trends and share price reratings in sectors such as banks and housebuilders has given you good gains.
However, this strategy has led to a portfolio with a high level of sector concentration, with circa 21 per cent in banks and 28 per cent in property. The cyclical nature of the portfolio will also result in it having a very high beta. This has proved exceptionally successful in a rising market during the recovery phase. However, if conditions change then the portfolio is very exposed to a slowdown in the UK economy.
This high sector concentration does increase the risk within the portfolio as the current sector stance leaves the investors exposed to any decline in the property or financials sectors and, coupled with your residential buy-to let investments, means your overall financial position is very exposed to property market risks.
The investment pot is very UK-centric, with just 16.5 per cent overseas exposure invested into emerging and frontier markets, suggesting the long-term aim has been growth.
As you move towards retirement, further portfolio diversification should be considered within the UK portion and the overseas portion of the portfolio.
The portfolio contains 26 holdings, which is reasonable for diversification without overdiversifying. However, many of the holdings (by design) are within the same region or sector.
As you have stated that you have a relatively passive interest and are long-term investors with an infrequent wish to trade, you should consider reducing some of the larger sector exposures and diversifying into other areas. Greater diversification would allow you to structure a portfolio that would meet your income needs as you move towards retirement and better manage portfolio risk.
Tax planning seems to be a key driver of the portfolio structure process with Isa and Sipp allowances being fully utilised each year and a plan in place to bed-and-Isa and bed-and-Sipp each year while fully utilising capital gains tax (CGT) allowances. While it is sensible to use tax allowances as effectively as possible to minimise payment of tax, these rules are subject to change and you should be wary of letting tax take over as the main driver of investment decisions ahead of the quality of the investment.
