Work out your future costs and don't fret about an ideal

"My husband had always managed our investments and worked on a 'leave well alone' theory, which had seen us through peaks and troughs since the early 1990s," says Linda. "Shortly after my husband's death, I considered using a financial adviser, but decided I could do just as well myself given the cost involved. So I have managed the assets myself, but find it more difficult to find new investments to replace any that I have sold. I have been on a steep learning curve and rely heavily on Investors Chronicle.

"My objective is to protect my investments so they can fund end-of-life care. I am 71 years old and in good health, but I am aware that it is unlikely I will be able to continue to manage my portfolio in the longer term.

"My pensions amount to approximately £46,000 a year net, plus a 3.7 per cent dividend yield on my investments. Dividends are reinvested in my Isa.

"I own my own home, which is worth about £500,000 - I downsized two years ago hence the cash in NS&I products. I don't have any children and lead a relatively simple lifestyle, living within my pension income. But I think I am unlikely to be able to avoid inheritance tax (IHT).

"On the advice of friends I invested £40,000 in venture capital trusts (VCTs) as my pensions attract a higher rate of tax, and this has proved tax-efficient. But I would also like to keep my finances as simple as possible for my executors, which probably means I won't invest any more in VCTs.

"I have holdings of approximately £550,000 in my stocks-and-shares Isa, about £200,000 in an NS&I cash account and a further £20,000 in current accounts.

"I am certain that my portfolio is not the best and have attempted to provide a better balance since taking it on from my husband. For example, I have sold half my BP (BP.), Capita (CPI) and Alliance Trust (ATST) holdings.

I recently bought Scottish Mortgage Investment Trust (SMT) and Renew Holdings (RNWH).

Linda's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You say you are "certain that my portfolio is not the best". This is trivially true because nobody has an optimal portfolio - except by chance. Portfolio optimisation is an unattainable ideal because the future is unknowable. This is true not just for returns, but also risk and correlations.

In another sense, though, your comment reminds me of recent work by Christina Bannier and Milena Schwarz of the University of Giessen, who show that educated women tend to be underconfident about their financial literacy. And, in fact, this portfolio is OK.

The main reason I say this is that it has a good weighting to defensive stocks, including GlaxoSmithKline (GSK), Unilever (ULVR), Imperial Brands (IMB) and Reckitt Benckiser (RB.). The virtue of these stocks isn't so much that they'll do well if the general market falls - in such an event they'll probably just fall by less. It's that defensive stocks tend to outperform the market on average over the longer run, perhaps because investors neglect them in favour of more glamorous growth stocks.

I also like the idea of holding VCTs, although not for the reason you have them - buying an asset just because it offers tax advantages can be dangerous. Instead, the case for VCTs is that it's possible that future corporate growth will come not so much from quoted companies as from smaller unquoted ones - by the time a company floats on the market it has enjoyed much of the growth it'll ever get. VCTs give you exposure to this possibility.

Be aware, though, that the performance of VCTs is massively variable, so it's important to do your research on funds and their managers' track records before you buy.

Tanya Pein, investment adviser at In2 Planning, says:

It's not easy to suddenly take on a sizeable portfolio and build up knowledge from scratch, but you've made some wise moves in difficult circumstances.

A priority now would be to calculate how much you'll need to pay for good quality residential care, when the time comes. I'd suggest a cash flow projection, taking into account local care fees, expected lifespan and inflation, plus a sum to cover costs so you can stay in your own home living independently as long as you wish to. Once you have that figure, you will have peace of mind in terms of knowing that you are protecting the right amount of capital using NS&I products, other cash accounts and low-risk investments such as gilts, and can consider how you invest the balance.

Of course, life is unpredictable, so do review the protected amount annually.

For the balance, I'd suggest a holistic question first: what would give you the greatest happiness and fulfilment? What could you do in the years to come that would 'make your heart sing?' Such a list would be a pleasure to write - perhaps favourite charities, home improvements, and travel with friends and family?

Annual gifts to charities also reduce income tax liability - as can pension contributions until the age of 75 - and could eliminate your exposure to the higher-rate tax band. Gifts to charities and others will also reduce inheritance tax on your estate, so it's worth using the various annual gift allowances so that the tax liability is gradually reduced.

Some financial advisers specialise in cash flow planning, and being able to discuss possible scenarios with someone impartial and experienced in this field could be helpful to you. But regardless of whether you seek an adviser, it is well worthwhile arranging Lasting Powers of Attorney now, so that you have the reassurance that there is a trusted person to look after your best interests, should one day you want or need this. There are two types, one for health and welfare, and one for property and financial affairs.

Rebecca Taylor, managing director of Aurea Financial Planning, says:

You wish to preserve funds for end-of-life care. I have undertaken some basic calculations, which indicate that at its current value your portfolio could fund £48,000 a year in care fees for 15 years before it runs out. Assuming a modest return of 2 per cent plus inflation, this should provide you with some comfort - especially as it does not take into account your existing pension income.

I suggest you seek the services of a certified financial planner. You may not need someone to manage your portfolio for you, but you may benefit from having a financial plan drawn up to show what position you are in. You would be able to look at scenarios based on your concerns about later-life care, and then be able to more clearly evaluate what the portfolio realistically needs to achieve.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You're taking some bets on turnaround situations: Capita, Inmarsat (ISAT) and International Consolidated Airlines (IAG) did very badly last year. As a rule, such bets are dangerous: investors' reluctance to sell losing stocks often causes shares that suffer bad news not to fall sufficiently, with the result that they are overpriced even at their lower prices. As the old saying goes: "Never try to catch a falling knife." However, as these bets are quite small, and Inmarsat and International Consolidated Airlines are showing signs of life, this isn't a grave flaw.

While your portfolio isn't the best, it is reasonable. So rather than fret about an impossible ideal, just consider whether this portfolio is comfortable for you.

One key thing here is the split between safe assets and equities. You should - roughly speaking - expect an average annual return of around 2.5 per cent a year after inflation, but with around a one-in-eight chance of a 10 per cent loss in any 12-month period. If that chance of a loss seems too high, shift more into cash. If you're happy with it, stay as you are.

As for simplifying the portfolio, the obvious thing to do is to move more of your equity money into low-cost global tracker funds. But I don't think there's any rush to do this.

Tanya Pein says:

Inflation protection is key, especially as it is expected to rise in the UK and globally, with large population increases worldwide. The impact of climate change and population growth are major drivers of economies, and a sustainable investment approach would take these into account. Interesting sectors for you to consider would be infrastructure, property, water, timber, renewable energy and environmental protection.

Once you've worked out how much you actually want to invest - aside from your later-life care needs - reflect on your tolerance of investment risk, to ensure that your portfolio choices are suitable for your personal reactions to the fluctuations of stock markets and individual companies. I wouldn't make changes to your asset allocation until you have worked out how much you want to invest beyond cash/low risk, but about two-thirds of your portfolio is in equities, which seems a high allocation when considering your objectives. It would be a good idea to include fixed interest, and to extend your exposure to property beyond the UK.

You will continue to have a significant proportion of your portfolio in cash, so shop around for competitive interest rates, and then review your choices once or twice a year. If you like an element of surprise, you can place up to £50,000 into Premium Bonds. These have a capital guarantee, but only of the purchase price, so be aware that you are effectively paying the rate of inflation as you go along.

Rebecca Taylor says:

You talk about wanting to 'protect' your investment, therefore it would not be appropriate to aim for ambitious growth and take on high risk. Without knowing the impact from capital gains and the resulting tax, I would suggest that you give this portfolio a complete overhaul. It is relatively high risk due to the concentration in UK stocks: it is highly reliant on the UK market, but the overriding risk factor is that it is almost 100 per cent invested in equities.

A basic rule of investing is to diversify. The asset allocation needs to have the highest impact on overall performance, not the individual stocks, and, because this is not the situation in your case, this portfolio concerns me. I completely understand an investor's desire to pick his or her own stocks and I appreciate the tremendous feeling of satisfaction that comes with this, however the basic principles should always be considered.

A portfolio of this size requires diversification in a number of ways: in terms of geography, market-cap and sector. It should also incorporate defensive assets such as fixed interest.

There is limited diversification within the two investment trusts you hold as they are substantially invested in large US companies. So to diversify further I suggest that you introduce more funds into the portfolio and reduce the number of individual holdings.

The VCTs and Alternative Investment Market (Aim) shares are at the higher end of the risk spectrum and it is highly questionable as to whether you really need to take this level of risk, although you have enough capacity for loss to do this.

To limit risk and reduce the volatility of your portfolio, you should consider simplifying it overall.