Cut your losses and spread your risk

"I have been investing for 30 years, and my investment objective to date has been to achieve an overall return on the investments of between 4 per cent and 5 per cent until the age of 65, and then to take an income to supplement my final-salary index-linked pension of £38,000 a year," says Mark. "I have always reinvested dividends within the individual savings account (Isa) and have been investing the maximum allowed each year.

"In recent years I have started to take an income from my large holding in Merchants Trust (MRCH), which is held outside my Isa. I purchased a large number of shares in this investment trust with my pension lump sum purely for the dividend, which amounts to about £15,000 a year gross. But I am not convinced this was a good decision and perhaps should have spread the risk more - I also hold Merchants Trust within my Isa. And this is also going to become a problem shortly due to dividend taxation and the poor performance of the shares.

"I am financially secure and see no immediate need to liquidate major parts of my portfolio to fund my retirement. But I intend to travel.

"I look to keep costs to a minimum to maximise growth. I try to shelter as many of my investments as possible within tax wrappers, and generally don't use advisers.

"I have always been risk-averse, which I think is reflected in many of the shares I have chosen, and my substantial allocation to NS&I Index-linked Savings Certificates. High-yielding relatively safe FTSE 100 shares have always featured in my strategy, for example, Royal Dutch Shell, (RDSB), Carillion (CLLN), National Grid (NG.), United Utilities (UU.), and in the past BP (BP.) and Marks and Spencer (MKS).

"Venture capital trusts (VCTs) and some speculative shares are perhaps my riskiest investments, although the VCTs I hold are perhaps the safest and longest established, EDGE (EDGH) being a notable exception.

"I have always taken a long-term view on stock market investments. On certain occasions my portfolio valuation has shown weekly losses of £6,000 or more which have over time corrected themselves. I have accepted this as a feature of long-term investment in stocks and shares.

"Going forward I think this situation will not change much, although certain of my shares, such as FirstGroup (FGP), Rolls-Royce (RR.) and HSBC (HSBA), have lost over 25 per cent of the price I paid for them. I find it difficult to say how much I would be prepared to lose now.

"I tend to hold shares for longer than I maybe should for sentimental reasons.

"I try to spread risk by purchasing investment trusts and shares in different sectors, although tend to concentrate on UK shares. I don't continually study the markets, nor do I wish to in retirement, but do keep a regular eye on what they are doing.

My concerns include:

■ Hanging on to poorly performing shares such as FirstGroup.

■ Having a narrow, UK-concentrated investment strategy based mainly on FTSE 350 shares.

■ VCTs accounting for too much of my portfolio, although I think the majority of them have performed well. I purchased them to offset tax.

■ Having too much in individual holdings.

■ How to move forward now I am retired: I may want to buy a larger house and to supplement my pension.

Mark's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

I'm not sure that taking dividends from Merchants Trust held outside an Isa is tax-efficient. Remember that you can create your own dividends simply by selling any holding, and that you have an annual capital gains tax allowance (CGT) of £11,100. It might be better to get 'income' by realising capital gains.

Financial advisers can play an important role in helping you navigate the tax system, so consider getting advice on this.

You tend to hold on to losing stocks. This is a very common mistake. All investors incur losses on some holdings - nobody is 100 per cent right - so follow this simple rule.

If you sell whenever a stock falls below its 200-day moving average, you will, more often than not, spare yourself from long-lasting price falls. There is often momentum in share prices, both up and down. You can avoid some of the latter.

Paul Derrien, investment director at Canaccord Genuity Wealth Management, says:

Your level of return looks to be within your conservative target, and while you have been a longer-term investor the level of risk you have been taking appears appropriate. However, you are taking much more risk than perhaps you appreciate and, as your time horizon reduces, this is an area you will need to focus on.

You have a significant proportion of non-equity diversification and inflation protection via the NS&I Index Linked Savings Certificates and investment properties, which will reduce some of the volatility and protect against any inflation risk.

Your VCTs have mostly provided a good tax-efficient return and seem to be serving their purpose.

But Merchants has performed poorly and around 33 per cent of your portfolio is invested in this one fund. You also have a large number of small investments that are making little or no difference to your overall return or diversification. There are a handful of companies other than Merchants that make up a large proportion of the remaining assets, and while most have been OK, you seem to have continued holding Carillion for sentimental reasons, and this may be a reflection of your broader investment strategy.

Move the low-income investments outside the Isa and keep the higher-yielding ones inside, to try to get your overall dividend income outside the Isa down below £5,000 a year.

Colin Low, managing director of Kingsfleet Wealth, says:

Although you have suffered paper losses of several thousand in a week and understand this is part of investing for the long term, I would argue that this is not the strategy of a risk-averse investor, but rather one that accepts volatility as part of the process of obtaining a real return.

Regarding your 5 per cent total return objective, look to reduce the level of risk that you take in line with your stated attitude to risk, and income and growth objectives. Or understand that while your investments could deliver significantly higher returns than you are seeking, they could also experience higher volatility and make greater losses than you seem to be willing to sustain in the medium term.

Dividend tax is an issue with the investments you hold outside your Isa, other than the VCTs, especially with such a high payout coming from Merchants Trust. Use your annual CGT allowance to obtain income free of tax.

You should shelter the investments held outside your Isa within an Isa at the earliest possible opportunity. The new taxation implications for buy-to-let investors may also have some adverse bearing on your net income.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

This portfolio is hugely unbalanced because of your massive position in Merchants Trust. This is compounded because this trust's biggest holdings are also two of your own biggest positions - GlaxoSmithKline (GSK) and Royal Dutch Shell.

However, Merchants has a bias towards defensive stocks, as indeed do you. This is a good thing because defensives tend to do better than they should on average and over the long run.

It's often a bad idea to buy something just because of a tax break. But VCTs can have another virtue. It's possible that the best growth opportunities lie outside stock market listed companies - perhaps because dispersed shareholders don't provide sufficient oversight of management. Private equity offers investors a way to diversify corporate forms and spread the risk that listed stocks are not the best vehicle for achieving growth.

You have a relative lack of overseas exposure. I stress relative, because even the most parochial of UK stocks are correlated with the global market. Such low exposure has cost you in recent years, simply because the world market has for a long time outperformed the UK. We can't say for sure whether this will continue.

I would, however, sell some of your holding in Merchants Trust and buy a global tracker fund to get some exposure to the possibility that global markets will continue to beat the UK. This might not happen, but your big weighting in domestic stocks and NS&I Index-linked Savings Certificates offer protection against this risk.

Paul Derrien says:

Your capital seems to be surplus to requirements, but your income is not, so look at your overall risk level. Your portfolio allocation does not look like a risk-averse strategy, so diversify more away from equity.

Consider alternative fixed-income funds such as NB Global Floating Rate Income (NBLS) or other asset classes not correlated to equity and fixed income, such as infrastructure. You can access this via funds such as The Renewables Infrastructure Group (TRIG).

You could top up your holding in RIT Capital Partners (RCP), although as this trades at a premium to net asset value (NAV) maybe consider Caledonia Investments (CLDN), which is on a 15 per cent discount to NAV.

Reduce your number of holdings, perhaps replacing direct share investments with investment trusts. This will improve the risk profile and mean you have fewer investments to follow, which will be a good idea if you are going to travel more.

Sell Merchants Trust: over the three years to the end of December its share price is up 3.6 per cent while the FTSE 100 is up 18.4 per cent. Use the money from this to spread the portfolio risk and rebalance the size of your holdings. Don't forget to be disciplined about taking profits, in particular cutting poor performers.

Add to better performing alternatives that you already hold such as Edinburgh Investment Trust (EDIN) and City of London Investment Trust (CTY), although don't obsess over income. Don't restrict yourself to one investment style and look to buy the best potential performers - there is no harm in supplementing your income with capital.

Colin Low says:

Your significant holding in Merchants Trust concerns me. Although it has a long history, to invest such a large proportion with one manager is a significant risk. You should have a very clear strategy in terms of asset allocation, income yield targets, price targets and stop-loss prices. Otherwise investing can turn into investment collecting.

Review your VCTs, and remove and replace those that are underperforming, if your taxation position permits this: if the VCTs were acquired at issue they need to be held for five years to ensure you get the income tax relief.

Also consider purchasing VCTs on the secondary market. They will not provide you with 30 per cent income tax relief, but you may be able to purchase them at a discount to NAV and the dividends they pay are still tax-free. Well-run, generalist VCTs have been delivering very good income levels and steady investment returns.