Generating an income to meet the costs of care

"I have a problem that, I expect, will be experienced by many more people," says Petra. "I now have the Power of Attorney together with our three children for all of my husband's affairs, as he has Alzheimer's.

Only one of our children is in financial need, but we have treated them equally in our wills. We do not need investment income for our basic living expenses at the moment, but caring for a husband with Alzheimer's is likely to become expensive.

My husband has a NatWest pension of £36,700 a year, state pension of £8,992 a year and a Standard Life pension of £750 a year. I have state pension of £3,612 a year and other pensions worth £3,718 a year.

My husband also has Premium Bonds worth £8,000 and I have ones worth £7,000, which we keep as an emergency fund.

Between us we have four individual savings account (Isa) investment portfolios: one each with NatWest, as my husband used to work there, including £24,000 cash to invest. I have a second one with Hargreaves Lansdown and my husband has a second Isa with Standard Life worth £5,000.

My husband's portfolio is in dire need of revision and although I enjoy investing I no longer have the time to spend on the necessary research and maintenance. A reappraisal of our finances is well overdue.

I generally invest for the long term, but am sanguine about small paper losses, especially if the income is reasonably good.

My last three trades were purchases of CF Woodford Equity Income Fund (GB00BLRZQB71)* and Ricardo (RCDO) and the sale of BlackRock Greater Europe Investment Trust (BRGE).

Petra's Hargreaves Isa

Petra's NatWest Isa

Petra's husband's Isa

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You say you no longer have the time to spend on research and trading. There's a simple solution here: a fund you can buy that offers you access to the best ideas of the best brains in finance, which you can buy and forget about for long periods, and which comes at a very low cost - lower than the cost of moderately active trading.

I refer, of course, to FTSE All-Share tracker funds. If stock markets are informationally efficient share prices will embody all available information, meaning the market is the best possible portfolio you can buy. It is, in effect, a fund of funds that embodies everybody's best thinking. And if all information is already in the price, other people have done the research for you so there's no need to research shares.

In theory, therefore, you should sell all your stocks, buy a tracker fund, stop worrying and focus on the more important things in life. Doing so would not make much difference to your investment performance as these portfolios are already much like trackers. They contain a mix of high-beta stocks that move more than one-for-one with the market, for example, banks and emerging markets; and lower-beta ones such as utilities and telecoms.

This gives you an overall beta of close to one, implying that your portfolios will move more or less as the market moves.

And by holding so many stocks you are, in effect, reducing idiosyncratic stock risk. Across your three portfolios you have around 50 different stocks and funds. This means that even if the average one beats the market by 10 percentage points, it will add only 0.2 per cent to your overall performance - which is less than a decent day's return. And in holding so many the chances of a significant number beating the market is small - not least because the circumstances in which, say, your defensive stocks do very well are likely to be ones in which banks do badly.

Simon Bonnett, senior consultant, private clients, Beckett Financial Services, says:

The level of future income you need should be identified after accounting for the detail and level of care required, and benefits offered to cover this as some are means-tested. Get assistance on this from organisations such as Citizens Advice or Age UK.

People with Alzheimer's tend to have a shorter lifespan, so you should check what your pension income will be after your husband's death - see how much widow's pension you will receive. This may allow capital to be used now to supplement pension and investment income, as you may require less income after his passing.

You can also inherit the value of your husband's Isas, so the tax-efficient wrapper can be maintained. You should also start considering the various estate planning options for passing wealth to the next generations: the solutions will be dependent on you and your husband's total wealth and the income requirements of the survivor.

It is likely that your time will increasingly be centred on the care of your husband, so you could consider outsourcing the management of your portfolios to a professional.

Angela Murfitt, chartered financial planner at Fairstone Financial Management, says:

To improve your tax planning you could consider transferring part of your personal allowance to your husband to reduce the amount of higher-rate tax he is paying.

The premium bonds are great as an emergency fund and I note you hold a small separate pot of cash, but this seems a little on the low side, so consider holding back some of the cash in the Isas to fall back on should the need arise.

You could transfer your Isas into one each for you and your husband, which will cut down on administration and may also reduce costs, as well as reducing the burden of managing your portfolio.

Direct shareholdings are considered higher risk than the more diversified collectives in your portfolio because investment risks are concentrated in the one share, rather than spread across a range of investment areas and companies as with collective investment funds.

The investment risk of the direct equities is dampened because the companies you invest in are 'blue-chip', mainly FTSE 100 stocks, in utilities, banking and services. But the nature of share investing is unpredictable, and highlights the need to keep a constant watch over markets and company performance.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

For someone in your position, tracker funds are a good idea. Many people will object to this view on the grounds that my presumption is wrong and markets are not efficient. If we're being precise, they are right. But not by very much. Tracker funds are for many people a good second best.

What's more, it's easy to ameliorate the two biggest problems with trackers, should you want to.

One problem is that the aggregate market is prone to overreact - fall too much and rise too far. The solution to this is to rebalance occasionally, by varying your mix of cash and equities. Useful rules here are:

■ Sell in May, buy on Halloween.

■ Sell when prices are below their 10-month (or 200-day) average.

How far you follow them will depend on your attitude to risk - it needn't be a matter of all in or all out of the market. You should not, however, alter your asset allocation very often.

Secondly, we know that some categories of shares tend to beat the market on average over the long run. These include momentum stocks, defensives, income stocks and quality stocks, defined by objective factors such as growth and payout ratios. If you want, you can get passive exposure to income stocks via a dividend-plus ETF [such as IC Top 50 ETF SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV)]. And several income funds are defensive, having a high weighting in pharmaceuticals, utilities and tobacco.

I'd warn you against chasing income for income's sake, though. What matters is total returns: you can, in effect, create your own income by selling some stocks.

Samantha Owen, portfolio manager at Beckett Asset Management, says:

The income objective is not being met by the current portfolio structures. While there are some high-yielding individual holdings, all the portfolios have high cash weightings which effectively yield nothing at present.

A stable and secure 5 per cent income in the current environment of low rates and low growth is a tough task, and would necessitate buying more risky, volatile income streams with volatile underlying capital values. This is at odds with your aim of preserving capital.

In a world of low numbers you may have to call on some capital to top up natural income. The portfolio could be rebalanced to include a wider range of assets to help diversify the income stream and reduce the heavy reliance on UK equities. Your NatWest portfolio has 87 per cent exposure to UK equites, your husband's NatWest portfolio has an 84 per cent weighting and your Hargreaves portfolio has a 65 per cent weighting to them.

You could benefit from a wider geographical exposure to diversify risks to capital, perhaps holding overseas investments that are hedged back to sterling to avoid currency fluctuations.

There are so many holdings, it is entirely sensible for you to rationalise your portfolios.

Some large positions dominate the performance and risk of the portfolios. DS Smith (SMDS) in one portfolio represents a 17 per cent holding, which is a lot of stock-specific risk.

Given you have greater demands on your time, you could consider moving into managed funds or multi-manager funds, in line with your attitude to risk and income objectives. Managed funds tend to buy direct assets, and multi-manager funds invest in other funds and generally have a higher cost. Funds investing in active funds are likely to cost more than funds investing in passive funds.

But active funds would be more like the way you invest now.

You could buy and hold these types of fund, therefore reducing transaction costs. But you might want to rebalance them periodically to ensure they still meet your requirements.

Angela Murfitt says:

The collective investments you hold invest in many of the same stocks you hold directly and therefore there is a hidden concentration risk in your portfolio. A more diversified approach would result in improved stability, and possibly better growth and income opportunities, by accessing different types of assets from a broader geography.

I would advocate taking a managed approach. This would involve investing in a multi-asset collective investment fund which would improve your asset allocation while driving towards a specific objective. The running costs of these funds are lower than some other approaches you could consider, although you would need to have some involvement such as choosing the right fund to meet your objectives and reviewing this periodically.

An alternative would be to appoint a discretionary fund manager who would tailor a portfolio to meet your individual objectives and needs. This is a more expensive route but can still represent good value for portfolios of your size, and needs little of your involvement or time.

Discretionary fund managers usually offer a managed portfolio service as well as a bespoke service, and can be particularly useful for working towards a defined income objective or specific growth target within a given risk profile.

*IC Top 100 Fund