Peter's passive portfolio

He says: "Most of my holdings are contained within individual savings account (Isa) and self invested personal pension (Sipp) wrappers - a combination of my allowances and my wife's - and I plan to bed-and-Isa holdings that are within non tax efficient UK accounts over the next few years.

"I don't have any particular investing goals, I just want to maintain and grow my levels of wealth so that I can scale back on the amount of hours I do over my working life as I see fit. This might include going part-time and using income, and perhaps even selling holdings to subsidise any loss of earnings.

"In addition to the portfolio holdings detailed, I have around £100,000 of restricted company shares in a US financial services firm, and around £200,000 of cash spread across multiple accounts in a range of currencies, as I have spent time living overseas and may return to life as an expat at some stage. The equity I have in my house represents around 50 per cent of its £550,000 valuation."

Peter's portfolio

Chris Dillow, Investors Chronicle's economist, says:

There's a lot to like about this. Not least that you are starting young. This means that, unless things turn out very badly, you'll benefit from the power of compounding returns. For example, a three per cent annual real return will turn this portfolio into £560,000 in today's money by the time you are 50 - and this ignores your cash holdings, restricted company shares and any further savings you might make.

I like too the fact that most of your money is in funds. This is especially important for younger investors. Over the long-run, there's a high chance of even apparently unassailable companies getting into trouble - how many of the original constituents of the FTSE 100 (the biggest firms 30 years ago) do you recognise? So it's better to back the field rather than particular horses.

I also like the fact that you are trying to minimise outgoings by holding mostly passive funds and by taking advantage of Isa wrappers. One of the first rules of investing is avoid unnecessary out goings.

It is good that you recognise you can create income from a portfolio by selling holdings. Too many investors make the mistake of thinking that if they want income they must hold higher yielding shares. This causes them to invest in overly risky stocks and under use their capital gains tax allowance. What matters instead are total returns, not dividends. You can create your own dividends by selling shares.

But there are some issues.

You might expect me to dislike your investments in active funds. But I don't. The downside risk here is mitigated by it being only a small part of your overall wealth.

Secondly, you have a negative view of fixed income. I agree. But this is little comfort, as I've been negative about it for some time - and wrong. But there's a case for bonds even though the outlook for them is negative. For one thing, if you hold them to maturity you are locking in returns. Low returns, admittedly, but you are avoiding risk. Secondly, even bond funds act as a hedge against some types of equity risk: if investors fear recession or simply get more risk averse, bonds should do well.

Bonds also protect us against the risk of secular stagnation - low long-term growth. Or at least more than equities. This is an especial danger for younger investors such as you, as it would probably mean not just low long-term returns on shares but also a weak labour market and thus a risk of unemployment or falling real wages. It might therefore be wise for younger folk to own bonds.

This fact might help explain something which some readers might find surprising - that your equity weighting is quite low. If we consider your cash and restricted shares as well as these assets - as we must because what matters is one's total portfolio - then shares account for only around half of your assets.

However, I don't think this is a problem. Yes, history shows that shares have done well in the long-run. But I'm not sure this justifies young people holding lots of them. For one thing, that might just be luck. Basic statistics tell us that there's a small chance of shares doing horribly even over long periods - a chance magnified by the risk of secular stagnation. The fact this hasn't happened in the past doesn't mean it can't happen in future.

And younger people must consider risks to their biggest asset - their human capital, or earning power. If this is risky (say because you face the danger of job loss) or correlated with equities, either because you work in financial services or face cyclical risk of job loss, then equities are risky. This would justify a lowish weighting in them.

But overall I really don't see much wrong with this portfolio.

Gina Miller, a founding partner at SCM Private, says:

Looking at these active funds we would question the Standard Life GARS Fund (GB00B28S0093) as we do not believe in investing in things we don't understand - our view is that only a rocket scientist could understand the various strategies and risks within this fund.

In terms of your income requirements, I suggest you simply collect the various dividend payments along the way rather than sell individual holdings, otherwise you will be tempted to always cut your winners and end up with a more concentrated, less balanced portfolio. There are some managers that allow income to be automatically paid to your bank account without significant extra costs.

We have a few recommendations regarding the passive part of the portfolio. In terms of your existing ETFs you could save significant costs by switching some of these to lower cost ones. You could switch your iShares FTSE 100 ETF (ISF) into its newer iShares Core FTSE 100 ETF (CUKX) which charges 0.1 per cent rather than 0.4 per cent a year.

Similarly, you could switch your iShares MSCI World ETF (IWRD) into that company's newer Core MSCI World (SWDA) which charges 0.2 per cent rather than 0.5 per cent a year. You could also switch from the db X-trackers FTSE All-Share ETF (XASX) that charges 0.4 per cent year to the SPDR FTSE All-Share UCITS ETF (FTAL) that charges just 0.2 per cent a year.

In our view, if the goal is to have a less actively managed portfolio, we would not recommend holding any commodities ETFs as they tend to be much more volatile and the returns are generally much lower over long periods.

In terms of your emerging market exposure, the Vanguard fund is a good ETF but you might want to consider a global emerging markets small cap ETF as valuations in this area are extremely attractive. The great advantage of an index fund in small cap is that you can reduce your individual stock risk whilst keeping the overall growth of the asset category. The SPDR MSCI Emerging Markets Small Cap UCITS ETF (EMSM), for example, invests in 831 different companies with an estimated three to five year growth rate of 17 per cent a year.

We would not comment on your individual shares, but from a top level view you might want to consider either something more speculative or simply adding to your existing ETFs depending on your overall appetite for risk.

We note that you hold a UK inflation linked ETF and a Spanish government bond ETF. They have both done very well but I feel neither are attractive at current levels.

The inflation-linked ETF holds bonds with an average maturity of 21 years which given your negative view of fixed income generally, would make it quite vulnerable were UK government bond yields to rise significantly. Equally, European government bond yields are absurdly low and have dragged some of the periphery bond markets such as Spain with them - sooner or later normality will return. You could switch these into a shorter term and medium term UK corporate bond ETF - the iShares £ Corporate Bond 1-5yr UCITS ETF (IS15) yields 2.9 per cent a year or the longer maturity SPDR Barclays Sterling Corporate Bond UCITS ETF (UKCO).