Beat inflation with a balanced portfolio

"I have a medium attitude to risk," says Robin. "In theory, I could lose most of the portfolio and still live more or less as I do at present - I am not a big spender. I intend to leave the whole of my estate to charity.

"I plan to top up my holdings in RIT Capital Partners (RCP), Vanguard LifeStrategy 20% Equity Fund (GB00B4620290) and Premier Multi-Asset Monthly Income Fund (GB00B7GGPC79) over the next 12 months, if possible taking advantage of market pullbacks.

"I will put £15,240 of my cash into my individual savings account (Isa) in this tax year. I haven't yet decided how I will invest it, so I would welcome some suggestions. The rest will remain as cash. In subsequent years, I will gradually move the holdings outside Isas into Isas.

"In the event of a major market correction I would sell the defensive funds, such as Troy Trojan (GB00B01BP952), and invest the proceeds in my more adventurous holdings, or add new ones.

"My National Savings & Investments (NS&I) Index-linked Savings Certificates will shortly mature, so is it worth rolling these into new ones given the low rates on offer?"

Robin's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You ask whether you should reinvest in index-linked savings. Two things make me say yes.

Real bond yields around the world are low, in large part because investors anticipate weak global economic growth. This is a climate in which returns on equities might well be poor. Bonds are insurance against weak economic activity and equity risk - and insurance is always expensive when everybody wants it.

Secondly, there is a risk that the coming increase in inflation caused by sterling's fall might persist, if it leads to higher wage demands. Index-linked bonds offer protection from this possibility. I think this is a low probability, but the small chance of a nasty possibility should be considered.

You wonder how to invest this year's £15,240 Isa allowance. Assuming you've decided on your basic asset allocation and that this money is to be invested in risky assets, the default option should be a global tracker fund. I say this because if you don't know what to do, do what others do. And the average investor - by definition - holds a global portfolio. I top up my equity Isa holdings every autumn in an attempt to exploit the 'buy on Halloween' rule.

James Norrington, specialist writer at Investors Chronicle, says:

It was pointed out in your review three years ago that you had a barbell portfolio: safe money-market instruments and some high-risk plays, and not much in-between. This isn't really a problem if you are comfortable with the possibility of large falls in the value of risk assets. You say you don't have many outgoings and the cash is a backstop against unexpected expenses. One thing you might need to consider, however, is the possibility of care needs later on. With this in mind, it is sensible to take steps to include some more moderate risk exposure in the portfolio.

You have been wise to keep an allocation to cash and invest some money in lower-risk options, such as NS&I 65+ Guaranteed Growth Bonds and NS&I Index-linked Savings Certificates. Rates may be paltry, but when the NS&I Index-linked Savings Certificates mature it will probably be a good idea to reinvest in a similar low-risk instrument.

The role of cash and money-market holdings in a portfolio is to provide liquidity and capital protection, and the trade-off is lower returns. The danger is losses in real terms if inflation creeps up, but there is a balance to be struck between low- and higher-risk investments. Hopefully your riskier holdings will perform well enough to enable the overall portfolio to comfortably outstrip inflation, but you still need some less exciting savings products to mitigate the impact of periods when asset classes like shares and real estate do badly.

Ben Yearsley, investment director at WealthClub, says:

Your two objectives, to modestly top up your pension and to beat inflation, are modest targets, and should be achievable over the long run with a balanced portfolio of investments.

You are right to move your investments progressively into the Isas - there is no point in needlessly subjecting yourself to tax - and in the 2017-18 tax year £20,000 can be invested in Isas.

One of your goals is to beat inflation, so even though the rollover rates on NS&I Index-linked Savings Certificates are only Retail Price Index (RPI) inflation plus 0.01 per cent, the returns are tax-free. And with a weakening pound due to the vote for Brexit, inflation could pick up, meaning it could be a good idea to roll over into the new bond.

If you want other inflation-mitigating assets, infrastructure investments have traditionally been good for that and you can access them via funds such as First State Global Listed Infrastructure (GB00B24HJL45). In the bond space there is M&G UK Inflation Linked Corporate Bond Fund (GB00B44JC482).

Foresight Solar Fund (FSFL), meanwhile, invests in solar farms that benefit from feed-in tariffs or renewable obligation certificates. With this investment trust you are investing in electricity generation, often with inflation linking and subsidy payments. It has a yield exceeding 6 per cent.

It is important to understand what will happen if the company issuing your individual bond investments gets into financial difficulties, for example does it have any assets to fall back on? Be aware of the risks.

It's good to see you own some quality venture capital trusts (VCTs). Northern Venture Trust (NVT) and British Smaller Companies (BSV) offer a good tax-free dividend yield and, with pension contributions being curtailed for many, VCTs could become a more important part of many investors' retirement portfolios. You could consider investing in more VCTs later in the tax year to benefit from upfront income tax rebates and tax-free dividends.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

I've always thought of investment as a top-down process. First, you decide how to split your wealth between risky assets and safe ones, depending on your target returns and risk aversion, and then you decide what type of risky and safe assets to buy. You, however, seem to be doing things differently. You're delegating the job of asset allocation to fund managers via multi-asset funds such as CF Ruffer Total Return (GB00B80L7V87) and Premier Multi-Asset Monthly Income.

There's a problem here: fees. One might argue that there's a case for paying a fund manager more than 1 per cent per year of your assets if they've got stockpicking expertise, or are doing something you can't. This might be true with CF Woodford Equity Income (GB00BLRZQC88) or your private equity holdings. But I don't see the point of paying someone 1 per cent or more a year to hold cash and index-linked bonds. You can do that yourself for next to nothing.

I suggest, therefore, that you switch out of these funds and into cheaper equity funds and bonds. But I exempt multi-asset funds with low fees, such as Vanguard LifeStrategy 20% Equity.

You're thinking of switching out of defensive funds if there's a major market fall. I'm not sure this would be wise. Such a correction might not happen. And if or when it does, you might not feel like becoming more adventurous, simply because the same heightened pessimism that causes investors to dump shares might well afflict you too. Beware of the projection bias - our habit of projecting our current tastes into the future.

There are two types of defensive funds. Some are defensive because they hold bonds as well as shares. I see little point in them unless they have low costs.

And there are those - such as many equity income funds - that are defensive because they hold lower-risk shares. These are worth holding, given that defensive stocks tend to do better than they should over the long run.

James Norrington says:

In terms of the riskier parts of the portfolio, you have made use of collective schemes to gain exposure to different asset classes and regions. There is, however, still a significant tilt towards the highest risk-reward plays. The largest holdings in the portfolio are RIT Capital Partners and Vanguard LifeStrategy 20% Equity Fund. These give you developed market equity and fixed-income exposure respectively.

The Vanguard fund is a good core holding as it invests in a range of bond funds, spreading risk across different sovereign and corporate issuers. RIT Capital Partners is rather concentrated in technology and financial stocks. This doesn't make it a bad fund, but it doesn't give you the diversification benefit one would hope for from a core holding.

You have a number of smaller investments in more specialised funds. These are really a collection of satellite holdings in riskier assets such as private equity, emerging markets, specialised sectors and smaller companies. As an experienced investor, you may be happy with higher volatility, but if you are serious about moderating risk, you should have a smaller number of satellite holdings in just the themes you really believe in. This would free up capital for larger core holdings of assets that bridge the current gap in your portfolio, between low-risk cash-type investments and high risk-reward plays.

In terms of core equity allocations, this might entail using exchange traded funds (ETFs) or tracker funds to replicate the performance of whole markets and major developed regions. As you are drawing some money from your portfolio, well diversified income funds would also make sense.

I would keep an eye on the number of holdings and be prepared to sell some investments before adding any new funds. Some of your holdings perform the same function as others and have similar exposures, so you may be racking up charges unnecessarily.

Ben Yearsley says:

Your portfolio is largely filled with long-term quality investments. In terms of investing new money, markets are volatile at the moment and, with sterling plunging, overseas assets are looking less attractive. But one area that looks undervalued is financials. This has been quite volatile recently, but there aren't too many other pockets of value around. Polar Capital Financial Opportunities (IE00BCRYMJ17) or Jupiter Financial Opportunities (GB00B5LG4657) are options to consider.

When I reviewed your portfolio in 2013 I mentioned that I didn't like ETFs and passive investing in areas such as emerging markets, and I stick by that comment. There are some markets where being active makes much more sense.

I suggested three years ago switching iShares Emerging Markets Local Government Bond UCITS ETF (SEML) for a fund such as Investec Emerging Markets Local Currency Debt (GB00B58SJV49) - and I still think you should switch. Over three years the Investec fund has fallen 7.8 per cent versus a fall of 12.1 per cent for the ETF (at time of writing). The Investec fund also offers an attractive 5.96 per cent 12-month yield.

I also think you should switch SPDR S&P Emerging Markets Dividend UCITS ETF (EMDV): I would rather buy active in this space and options include Lazard Emerging Markets (GB00B24F1G74) and Fidelity Emerging Markets (GB00B9SMK778).

A fund you could consider selling is CF Miton Value Opportunities (GB00B8QW1M42) as its managers are departing to join Polar Capital. You could follow them when they go over or buy a similar fund already up and running - Man GLG Undervalued Assets (GB00BFH3NC99).

I wouldn't sell defensive holdings such as Troy Trojan after a market pullback. You want different parts of your portfolio to have different characteristics, and perform well at different times rather than moving in tandem. Troy Trojan has an excellent management team and over the long run has performed admirably.

In the private equity space I prefer Pantheon International Participations (PIN), which trades on a discount to net asset value of around 25 per cent. Electra (ELTA) is in the midst of a lot of upheaval.