Broaden your holdings to maintain your returns

"The plan is to make the same sort of returns for 10 to 15 years, and then take an income from it," he says. But who knows what life has in store?

"My wife has asked me to manage this portfolio for her, and takes an active interest in its performance. We're child-free and have a small mortgage. She is also 51, and we're both employed and have about 10 years' service in our own occupational pensions.

"I've also got my own portfolio of stocks, but I'm managing my wife's portfolio as though it was standalone. Managing our joint assets as a single entity would be simpler, but might lead to misunderstandings.

"My wife can tolerate volatility typical of the wider market, say 20 per cent.

"With her portfolio I'm looking to invest mostly in investment trusts that have long-term strategies for maximising total return while minimising the risk of permanent capital loss. Ideally, I'd buy and hold indefinitely, but I do root out poor performers. On the other hand, I'm reluctant to sell down winners such as Lindsell Train Investment Trust (LTI), whatever portfolio theory might say.

Holding 12 separate trusts seems about right, but given the size of the underlying holdings, maybe this is too many?

I struggle to justify how holding bonds as an asset class makes sense at the moment - hence the cash allocation.

My last trades were:

■ Topping up Lindsell Train Investment Trust by £6,600 in May 2015.

■ Buying Schroder Oriental Income Fund* (SOI) and iShares MSCI Europe Momentum Factor UCITS ETF (IEFM) in January 2015.

I have on my watchlist minimum volatility exchange-traded funds (ETFs) including iShares MSCI Europe Minimum Volatility UCITS ETF (MVEU), iShares S&P 500 Minimum Volatility UCITS ETF (MVUS) and Lyxor FTSE Europe Minimum Variance UCITS ETF (MVEX), and Tritax Big Box REIT (BBOX).

Andrew's wife's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

The idea of a smallish portfolio of investment trusts is a good one: it gives you easy and manageable diversification. And I applaud your policy of rooting out poor performers while holding on to winners. We know that stock markets are, more often than not, subject to momentum effects. Your strategy is a way of exploiting these.

I would, however, mention some issues here.

The first concerns your expectations for returns. A total return of 7.5 per cent a year in nominal terms is just about feasible. As a rough rule of thumb, I'd assume that share prices rise in line with money gross domestic product (GDP), which we could assume will grow by around 4 per cent a year. A yield of 3.5 per cent on top of this gets us 7.5 per cent. With prices likely to rise by 2 per cent a year - assuming the Bank of England sticks to the inflation target - this implies a real return of 5.5 per cent a year.

However, there is a big danger here. The future might not resemble the past. Western economies might have fallen into long-term slow growth - secular stagnation. If so, shares might fall even over the long run as investors are consistently disappointed by profit growth. The fact that Japan's Nikkei 225 is only half the level of 25 years ago reminds us that decent long-run returns are not guaranteed.

It's this risk that might justify holding bonds. In a world of increasing fears of secular stagnation, these might continue to do well. In effect, they offer us insurance against a nasty danger. Yes, that insurance is expensive. But the fact that many people are happy to buy it might tell you something.

Philip Milton, chartered financial planner at Philip J Milton & Company, says:

Clearly you are an experienced investor. Your objective of 7.5 per cent a year is not expecting more than longer-term returns from a diversified portfolio of mixed assets, effectively what anyone should consider as possible or appropriate. That could be, for example, achieved by a yield of say 3 to 4 per cent, with capital appreciation to make up the difference - either inflation, economic growth or a combination of the two.

However, there will be ups and downs, and the past few years have created more volatility than normal - as well as some opportunities.

This is your wife's account, so her risk may be different to yours - even if it seems her plans are not dissimilar. Twenty per cent risk volatility may not be enough of an expectation in very nasty market conditions, based on your current portfolio. But can anyone afford to run their assets on an Armageddon basis forever? I suspect that what you have could face a worst-case scenario of 40-50 per cent downside in a meltdown, but what would you do - sell afterwards at the very best buying opportunity? Best instead to face what could happen if trauma arose like that and realise you could ride it out.

Stephen Peters, investment analyst, Charles Stanley

I like the overall look of your portfolio. With your attitude to risk and your time horizon, the exposure to both value and growth styles, and a bias towards smaller companies makes sense. The portfolio has a broad overweight to Europe and Asia, which is understandable given valuations in Europe versus those in the US.

But how are you investing - are you able to reinvest the dividends from the investment trusts efficiently? If not, then consider either investing in investment trust company share schemes, where available, or in similar open-ended funds.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

I'd advise you to keep an eye on trusts' discounts to net asset value (NAV). These can be a measure of investors' sentiment. A big discount - relative to the trust's own history - can be a sign that sentiment towards the trust, or the general asset class it invests in, is unusually depressed and will bounce back, offering good returns. And an unusually low discount or high premium can be a sign of excessively favourable sentiment and overpricing. Running your winners is a good idea, but not so much so that you hold on to stocks that are overvalued.

This portfolio might not be as well diversified as you think. Take Law Debenture* (LWDB). Its three biggest holdings are Royal Dutch Shell (RDSB), BP (BP.) and GlaxoSmithKline (GSK). Which happen to be the three biggest holdings of Merchants Trust (MRCH), too. You'd expect, therefore, that the two trusts might rise and fall together. Which is just what history shows.

Since the start of 2006, the correlation between annual price movements in the two has been 0.95. This is no isolated example. The correlation between Law Debenture and TR European Growth (TRG) has been 0.84, and between TR European Growth and Merchants 0.89. Bad times for one trust are therefore overwhelmingly likely to be bad times for several others.

This is not the fault of the trusts' managers. If you're running a portfolio of over £500m, there are only a limited number of stocks you can take a significant position in without incurring big liquidity risk. This generates a tendency to hold mega-cap stocks.

What's more, the simple maths of portfolio diversification mean that any two baskets of shares are likely to be correlated with each other simply because they are correlated with the general global market.

This isn't catastrophic. Over the long run, exposure to market risk might well be a good thing. Just be aware, though, that your portfolio might be riskier than you think.

Philip Milton says:

You like investment trusts, but be wary of chasing performance alone as the future is more important than the past.

You don't like bonds, so maybe as uncorrelated protection think about buying some alternative areas of fixed-income such as distressed bond funds like Acencia Debt Strategies (ACD) or Carador Income (CIFU).

You could also consider investment trusts focused on peer-to-peer lending as these are on discounts to NAV in many instances, and the underlying assets are potentially underpriced. There are special situations such as GLI Finance (GLIF) which could fill a hole and are uncorrelated.

I enjoy discount plays too as these reflect better value if I believe the underlying assets, strategy or segment are also good. I don't care so much about the past if I am buying. There are some attractive long-term plays worth tucking away: Blue Planet (BLP) and New Star Investment Trust (NSI) are two odd stocks where you could take a 10-year view - their vast discounts may tighten over that time, earning you a return for free.

You should spread your exposure further - diversify the opportunities and mitigate the risks. No top performer will maintain its position forever and if a good opportunity presents itself, you have to raise the money from somewhere.

Often investing is not about disliking something but about liking something more, and in that regard where is the money going to be found? We as a firm don't have many of the trusts you hold and I would raise money from two of your larger holdings to pursue my preferred choices.

Worldwide Healthcare* (WWH) has been overplayed so it is time to cash it in. We like TR European but you have too much in this one, and I don't have Law Debenture.

We sold out of 3i (III) after doing very nicely and prefer other private equity investment trusts with better prospects and at big discounts, and in any case you need to spread risk across this sector as no one will always deliver. You could consider Aberdeen Private Equity (APEF), a fund of private equity funds on a deep discount and which offers a reasonable yield.

You have no smaller company exposure but there is a plethora of attractive opportunities at discounts to NAV in this sector, some of which have good yields. Remember, dividends can be reinvested in the next best opportunity.

Other areas you might consider adding include emerging markets, and although you have exposure to Asia Pacific you have no Japan funds, something I suggest you rectify.

Stephen Peters says:

I'd suggest looking at your two UK equities trusts as I don't think they are the best available. Consider Perpetual Income & Growth* (PLI) and Standard Life Equity Income (SLET), as well as their open-ended fund equivalents. In both cases shareholders can accumulate dividends.

Considering a fund or trust focusing on capital returns rather than income might also be worthwhile. Options include Fidelity Special Values (FSV), Aberforth UK Smaller Companies Fund (GB0000072727), and if you want a discount play Aberforth Smaller Companies Trust (ASL).

I don't understand your interest in the Momentum factor ETF. But if you think that is an attractive theme you could consider JPM European Smaller Companies Trust (JESC).

If you want something with a higher risk/return profile than cash, but lower volatility than equities, consider an absolute-return fund or trust. Jupiter Absolute Return Fund (GB00B6Q84T67) aims for a return of around 6 per cent a year, which is not too far away from your target return.

BACIT* (BACT) invests in a range of funds and also has stakes in cancer drug developments. It trades at a premium to NAV, but benefits hugely from its fee-free investments in long-only and absolute-return funds.

Another volatility-smoothing option is RIT Capital Partners* (RCP).

With your long-term horizon in mind, a deeply out-of-favour sector or market such as emerging markets may be of interest. Templeton Emerging Markets (TEM) is a contrarian investment trust, and Findlay Park Latin American (IE00BWY58N31) is a well-managed open-ended fund in a hugely out-of-favour asset class.

Murray International* (MYI) is a very highly regarded trust that has suffered in recent times, but its manager and style remain unchanged.

*IC Top 100 Fund