Until 2011 most of Ian Kent's stocks-and-shares individual savings accounts (Isas) were in a discretionary managed portfolio with a bank. He had retired in 2005 at age 57 and needed income to supplement his private pensions until he received his state pension late in 2013. However, he found that the level of income provided by the bank's portfolio was insufficient.
In 2011 and 2012 he decided to start investing himself and has since achieved more income with this DIY approach.
He says: "Many of the most recent purchases within my Isa have been driven by the decision to reduce exposure to pooled bond funds. I know that the individual corporate bonds are more risky from a default point of view, but I do intend to hold them to maturity. I have invested in some individual equities, in a spread of sectors, and various investment trusts.
"At the end of 2012 I was showing some losses on recent purchases, notably Morgan Sindall and Tullett Prebon. However, these have since recovered a little. I intend to keep my investments for the long term. I want to limit trading costs. I am pleased with my decision to diversify into smaller companies via Dunedin Smaller Companies Investment Trust, which has shown a very healthy advance in a short period.
His continuing objective is to achieve a worthwhile level of immediate income, with scope for it to rise over time. "I am inclined not to rush into new investment," he says. "I can be patient and move into quality stocks if prices drop, so raising the likelihood of achieving better value and higher yields."
He expects to subscribe to his stocks-and-shares Isa for 2013-14 and to invest in equities rather than bonds. He would like some recommendations for this.
In addition to the Isa portfolio, he has an emergency fund held in cash Isas which is earning 2.5 per cent interest. He also has money in a self-invested personal pension, part of which is being drawn directly from the fund via drawdown
Isa portfolio
Rising income
IAN KENT'S ISA PORTFOLIO
| Investment Name | Date Bought | Cost £ Incl. Charges | Value £ * | Gain (Loss) | Annual Income £ | Yield % | Sector |
| Artemis Income Inc | Jan 09 | 5,000 | 6,094 | 21% | £273 | 5.40% | UK Equity Income |
| British Land (BLND) | Aug 12 | 5,028 | 5,093 | 1% | £250 | 4.90% | Property |
| City of London Investment Trust (CTY) | Aug 11 | 10,061 | 12,008 | 19% | £530 | 5.20% | UK Growth &Income |
| Dunedin Smaller Companies Investment Trust (DNDL) | May 12 | 5,037 | 6,900 | 37% | £180 | 3.60% | UK Smaller Companies |
| GlaxoSmithKline (GSK) | Nov 12 | 5,027 | 4,873 | -3% | £265 | 5.30% | Pharmaceuticals |
| HL M-M Strategic Bond Inc. | Jul 11 | 20,000 | 21,500 | 7% | £620 | 3.10% | Strategic Bond |
| Intermediate Capital 6.25% 2020 | Oct 12 | 5,000 | 5,050 | 1% | £312 | 6.25% | Individual Corporate Bond |
| Invesco Perpetual High Income Inc. | Dec 09 | 5,000 | 5,928 | 18% | £224 | 4.40% | UK Equity Income |
| J P Morgan Global Equity Income Inc. | Jul 11 | 15,000 | 14,280 | -5% | £539 | 3.60% | Global |
| Merchants Trust (MRCH) | Sep 11 | 9,991 | 10,264 | 3% | £623 | 6.20% | UK Growth &Income |
| Morgan Sindall (MGNS) | Aug 12 | 5,035 | 4,022 | -20% | £300 | 6.00% | Construction |
| Murray Income Trust (MUT) | Sep 11 | 10,000 | 11,531 | 15% | £516 | 5.10% | UK Growth &Income |
| Newton Global Higher Income Inc. | Nov 09 | 4,000 | 4,689 | 17% | £200 | 5.00% | Global |
| Perpetual Inc.&Grth. Inv. Tst. (PLI) | May-12 | 5,037 | 5,565 | 10% | £195 | 3.90% | UK Growth &Income |
| Provident Financial 7% 2017 Bond | Apr-12 | 3,600 | 3,821 | 6% | £252 | 7.00% | Individual Corporate Bond |
| Royal Dutch Shell B (RDSB) | Aug-12 | 5,006 | 4,599 | -8% | £225 | 4.50% | Oil &Gas |
| Scottish American Inv. Trust (SCAM) | May-12 | 5,036 | 5,260 | 4% | £220 | 4.40% | Global Growth &Income |
| St. Modwen 6.25% 2019 Bond | Nov-12 | 5,000 | 5,280 | 5% | £312 | 6.25% | Individual Corporate Bond |
| Tullett Prebon (TLPR) | Oct-12 | 5,037 | 4,231 | -16% | £300 | 6.00% | General Financial |
| Vodafone (VOD) | Nov-12 | 5,037 | 4,570 | -9% | £285 | 5.70% | Telecomms |
| X P Power (XPP) | Nov-12 | 5,010 | 4,896 | -2% | £240 | 4.80% | Electricals |
| Totals | £142,942 | £150,454 | 5% | £6,861 | 4.80% |
Source: Ian Kent, *As at 31 December 2012
SHARES ON HIS WATCHLIST: WS Atkins (ATK), Balfour Beatty (BBY), Unilever (ULVR), United Utilities (UU.), Henderson Far East Income Trust (HFEL).
Chris Dillow, the Investors Chronicle's economist, says:
There's a lot I like about your approach. First, you say you want to limit trading costs. Good. There's strong evidence that many retail investors, motivated by overconfidence, trade too much and incur costs without benefits.
Secondly, you plan to hold individual bonds to maturity, while being aware of default risk. I like this. If you think - reasonably - that the economy will recover in the next few years, it's possible that bonds' price risk will increase, as a sell-off in gilts leads to falling corporate bond prices, but default risk will fall.
Third, you say you're in no rush to add to your investments. I like this recognition that rising prices (often) mean falling expected returns, and vice versa. Too many investors get sucked into buying high.
Fourth, I like your preference for some investment trusts. The sector is sometimes under-appreciated by investors. One of its overlooked virtues is that, sometimes, trust discounts can be an indicator of sentiment, with a bigger-than-usual discount often leading to rising prices.
On the other hand, though, I have some quibbles.
One is your reluctance to hold cash. Of course, returns are pathetic. But remember that the worst possible near-term loss on cash is only the 1 or 2 per cent (unless you're in a lousy account) we'd suffer if inflation exceeds most expectations. This is much smaller than the worst possible loss on shares or bonds. And remember why interest rates are low. It's because the economic recovery is expected to be weak and vulnerable to shocks. This is an environment in which the outlook for shares is not certain.
A virtue of cash is that it gives us the chance to buy on dips. Don't overlook this.
I fear you might be paying too much attention to past profits and losses. This is dangerous because it might tempt you into the vice of 'getevenitis' - a desire to hold on to losing stocks in the hope of somehow breaking even. But shares don't remember the price you bought them at.
There are two reasons why you might look at your performance. One is to check for momentum. There's some evidence - albeit weaker in recent months than earlier - that individual shares have momentum, so that rises over a few months lead to further rises. Looking at past returns thus enables us to profit from momentum effects.
The other is that past performance is a learning experience. Big losses can be a sign that we've done something wrong; I say 'can' because the ratio of noise to signal in share price moves is high. If you want to improve your chances of getting feedback, write down the reasons why you buy a share and a few months later review those reasons; which are wrong? Are some of your reasons to buy systematically wrong?
You say you want a "worthwhile level of immediate income". But buying income shares is risky. Just ask: why should any share yield more than average? There are only three possible reasons: it is riskier than others, say because it is more vulnerable to an economic downturn; it has worse growth prospects; or it is irrationally underpriced by the market. Only the third of these possibilities provides a good reason to buy - although the first might also, if you feel like taking cyclical risk. The point is that income can come at a price.
You ask for suggestions on what to buy. This is tricky, as your portfolio is pretty nicely diversified anyway. The defensives on your watchlist would probably add to the defensive bias you already have and so might be redundant. Some emerging markets would give you exposure you don't have - not least in the form of high-beta exposure to rising world stock markets, but this comes at the price of extra risk.
Ben Yearsley, head of investment research at Charles Stanley Direct, says:
You have a good blend of equities and fixed-interest investments. Too many retirees rush to invest in fixed-interest investments forgetting that they may have another 30 or so years to live relying partly on a non-growing income stream. Risk is important, but so is return and the risk of inflation ravaging your portfolio over the long term shouldn't be ignored - therefore equities should form a part of many retirees' portfolios.
However, I do not think you have quite got your share exposure right. Many investors buy a handful of individual companies making up a large proportion of the overall portfolio without always realising how much risk is being taken. Your seven companies make up over 20 per cent of the entire portfolio. If you are going to buy shares directly, try to have a portfolio of at least 20 companies to give yourself a good spread and to protect your portfolio in the event of one blowing up. The other thing to remember when combining shares with unit and investment trusts is that you may be doubling up on the exposure, as you will not always know the underlying holdings of your funds.
It is sensible of you not to want to rush into the market with new cash. There is nothing wrong with patience in investing and the market has risen strongly in recent months.
Looking at the investment trust portfolio first, my first comment is that City of London, Merchants, Murray Income and Perpetual Income & Growth are all doing a very similar thing. Therefore why not consolidate into one holding and then add some diversification with one managed in a different style? I would consolidate into Perpetual Income & Growth (PLI) and then add a different type of income-orientated investment trust such as Finsbury Growth & Income Trust (FGT) or Standard Life Equity Income Trust (SLET). I would also look at selling Scottish American as it has expensive gearing and the manager is a value manager at a growth house. Maybe consider an open-ended global equity income fund such as M&G Global Dividend (ISIN: GB00B39R2N93).
I have absolutely no problem with your holdings in Artemis Income, Invesco Perpetual High Income or Newton Global Higher Income. I am not such a great fan of the JPMorgan Global Equity Income Fund so you may wish to consider the aforementioned M&G Global Dividend or a fund such as the First State Global Listed Infrastructure Fund (ISIN: GB00B24HJR07).
Finally, on the equity side, Royal Dutch Shell's share price is discounting a big capital expenditure spike to fix the lossmaking US upstream division - much bigger than I regard as plausible. BP may be worth considering and currently yields 4.6 per cent. The share price is discounting more or less the worst possible outcome from the remaining Deepwater Horizon litigation.
On the direct bonds side I would proceed with caution. Most investors have a fair grasp that if they invest in direct shares they can lose some or all of their investment. They do not always think the same with direct bonds. Just because it is from a company you have heard of does not make it necessarily a safe investment. I am not saying don't invest, more that make sure you understand what you are investing in.
