"Boring" portfolio needs no apology

"I want to supplement my income during retirement, with the hope of at least maintaining the capital value in real terms for the eventual benefit of my family."

Having been scarred by his private pension scheme experience - in particular by his investment into Equitable Life With Profits, which did not even match inflation over a 15-year period, he has ceased pension contributions (apart from his company scheme) in favour of building his own portfolio of equities. He tries to mitigate the intrinsic risks of equities by careful selection, building up his portfolio by regular investment from income, buying monthly chunks of £300 per stock. "Maybe one difference between me and the 'average investor' is that I consider my investment in solar power to be part of my portfolio."

As returns on cash individual savings accounts (Isas) are very poor he is considering transferring perhaps half of his cash Isa to his equity Isa.

"I think the shares on my watchlist will largely complete my portfolio for the time being and I will just be adding to the holdings I already have. I am keen not to make the portfolio too unwieldy as it seems easy to lose focus. Sorry if it seems a boring collection compared with other readers' portfolios - but I have a fairly simple objective and think if I tried to be too clever I would end up tripping myself up."

JOHN LOCKE'S PORTFOLIO

Source: Investors Chronicle. Price and value as at 13 June 2012.

Chris Dillow, Investors Chronicle's economist says:

You must not apologise for this being a boring portfolio. Pete Sampras, Geoff Boycott and Steve Davis were all called boring, and yet they were astonishingly successful in their fields. Many things are boring if they are done well, and investing is one of them. My concern is: is this boring enough? There is nothing intrinsically wrong with it. A roughly 50:50 split between reasonably safe assets and shares is sensible for many people, and an equity portfolio heavily weighted towards UK defensives and emerging markets is sensible for those with a less sceptical view of emerging markets than me.

The problem is that you expect to retire in just three years. And this makes shares especially risky for you, in the sense that if they fall you don't have much time to recoup your losses.

We can, roughly, quantify this. Based upon historic volatility and reasonable expected returns, there's a greater than one-in-five chance of you losing 10 per cent on your equity holdings over the next three years; that amounts to a loss of just under 5 per cent for your overall financial wealth. And there's a 15 per cent of a 20 per cent loss on your shares - 10 per cent of your overall financial wealth.

Do these seem like reasonable odds, in exchange for a 50:50 chance of making more than 15 per cent (in nominal terms) over the next three years?

If you're happy with them, then there is a case for shifting some of your cash into equities.

This is ultimately a matter of your taste for risk; there's no right answer. But let's be very clear. It is this question that determines whether you move out of cash or not. Frustration with the poor returns on cash - which we all share - should not influence your decision. Interest rates are low precisely because the outlook for the economy and hence shares is poor and risky. It would be peculiar to regard this as a reason to buy.

There is, though, one big issue to consider here: how flexible are you and your wife about retiring? If one or both of you can carry on working, then you are much more able to take on equity risk. This is because a longer working life allows you to save more if the market falls, and makes it easier for you to postpone buying an annuity, in the (reasonable) hope that annuity rates will eventually rise.

You say - rightly - that your solar panels are part of your portfolio. But a bigger part is your human capital - your ability to work. If you can stomach the thought of working longer - and if you are able to do so - then you have a valuable asset that can protect you from equity risk, and so allow you to take on more of it.

Two other things. First, you say that if one of the individual companies in your portfolio does well, you might take profits. Beware of this. Momentum is one of the few friends investors have. Don't abandon it lightly.

Second, you don't have a private pension. Now, I understand that you're scarred by your experience. And I have always been wary of with-profits pensions; investing in a single company with an opaque structure always struck me as odd. But I wouldn't advise others to emulate you. A private pension - a self-invested personal pension or a unit-linked scheme - is a nice way of sheltering your savings from tax. And one of the big rules of investing is to minimise taxes. While you're doing a lot that other investors would be wise to copy - not having an unwieldy portfolio, avoiding heavy trading and market timing - the lack of a pension is not one of them.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, says:

We are concerned that your retirement investments are missing out on government tax relief contributions. While your investments benefit from the tax shelter which individual savings accounts (Isas) provide, a self-invested personal pension (Sipp) might be a better option.

A Sipp can hold a broad range of investments, including the majority of those in your portfolio. In addition, pension contributions receive up to 50 per cent tax relief. For a basic rate tax payer, an investment of £8,000 net into a Sipp, would see the government automatically add £2,000 (20 per cent) basic rate tax relief - increasing the total contribution to £10,000 gross.

Noting your annuity concerns, we would highlight that you no longer have to purchase an annuity at retirement. More flexibility on how to draw a pension fund is now available.

Turning to cash Isas, with Bank of England interest rates at historical lows, savers are suffering. However, with individuals close to retirement, a switch from equities in to fixed interest investments or cash deposits is more normal. Capital conservation as opposed to capital growth becomes the key objective.

Much will depend on exactly when you plan to retire and therefore the time period available to invest over. For anything less than three years, and in such an uncertain economic world, cash appears most appropriate.

Given at least three years, you could consider some drip feeding of funds into the corporate fixed interest arena. We like the Invesco Perpetual and Jupiter Corporate Bond funds.

Alternatively, and given a timeframe to retirement of at least five years, and more preferably over seven years, you could consider equity funds where the dividend provides a focus, such as the PSigma or Rathbone Income funds.

In all, you should fully investigate maximising pension savings thanks to government tax contributions for both you and your wife, with conservation of capital very much the priority.