'Ma' is 86 and has been investing for 20 years. She has a portfolio worth just over £150,000 held in an individual savings account (Isa). This is managed by her bank and is invested in a diversified spread of bond and equity funds. However, recently the bank recommended that she convert it all into cash.
She says: "I am not happy about this as interest rates are so low. My son has offered to take over the management of the portfolio. I use the income (about £3,500 a year) as gifts to grandchildren. I can foresee I might need this money for care later, but at the moment am very fit and healthy. I understand I would lose the Isa wrapper by converting it to cash."
She owns a flat worth approximately £160,000. She has a pension income of £1,700 a month. "I only use the portfolio income for gifts," she says. "I intend the portfolio to be used if I need care later in life, or I would like to leave it to my sons when I die."
Describing herself as medium to low risk, she says she would not happy to see the portfolio eroded by being in cash.
Bond and equity funds
Care or inheritance portfolio
Ma's Isa portfolio - asset allocation
| Gilt fund | £2,226 |
| Corporate bond funds | £58,730 |
| High-yield bond funds | £25,077 |
| UK equity Funds | £31,639 |
| Global real estate securities fund | £3,681 |
| Global equity funds | £26,085 |
| Cash | £9,863 |
| Total | £157,301 |
Chris Dillow, Investors Chronicle's economist, says:
Your bank's recommendation that you convert this portfolio into cash is not serious advice. I can't think of plausible situations in which it would make sense to switch wholly from a combination of shares and bonds entirely into cash. Yes, I think there's always a case for holding some cash in a portfolio, even at negative interest rates - because it's insurance against asset price falls. But even I can't see a good case for suddenly deciding to have 100 per cent cash.
Instead, your bank is telling you it no longer wants your custom. Take the hint, and accept your son's offer.
How should he manage it? Given that you want the portfolio as insurance against needing care and as a possible bequest, the obvious thing to do - to annuitise it - doesn't apply in your case.
In truth, the basic outline of your portfolio seems reasonable - a mix of bonds of various quality and equities. This is because, in most circumstances, the two are likely to move in opposite directions, so that one protects you against the other. A stronger global economy would see shares gain and bonds fall, and a weaker economy would see the opposite. Either way, you're reasonably protected. Yes, there are circumstances in which both might fall together. But the chances of both falling to any great degree aren't especially likely in the near term. And your small cash holding and pension income offer a little insurance against this contingency.
Many people would think that someone of your seasoned years shouldn't hold shares. I'm not so sure. Insofar as you want to leave a bequest, you have in effect longer time horizons than many younger people who are investing only for themselves. And I'm not sure how the possibility of you needing nursing care affects the calculation. The risk of share prices falling a lot is low, and the risk of you needing a lot of care is also low; the Department of Health estimates that only one-in-10 65-year-olds will need over £100,000 of care and I suspect this risk is smaller for you. The conjunction of two small and independent risks is itself small. Given that you have large bond holdings, you're probably as well protected against it as you can be.
My bigger gripe is that you are incurring unnecessary charges. You're currently paying almost £30 a week to funds for the privilege of managing your money. This is way too much. Please try and cut these fees.
One way of doing so would be to shift your equity funds into a tracker - either a unit trust or exchange traded funds (ETFs). You can also shift your various bond funds into gilt and corporate bond ETFs, which generally have far lower annual expenses. You might think ETFs are newfangled and unfamiliar things. But is it really worth paying higher fees simply to have a feeling of familiarity?
This gripe aside, I have no big issues with your portfolio. What I do have problems with are banks that treat their customers badly; fund managers who charge unnecessarily high fees; and a financial system that is unable to offer people insurance against needing expensive care. Compared with the mess that financial professionals have made, you're doing fine.
Patrick Connolly, a certified financial planner at AWD Chase de Vere Independent Financial Advisers, says:
It seems rather strange that your bank is encouraging you to convert your whole investment portfolio into cash. It's often the case that banks are trying to move their customers from cash into more risky investments.
Usually moving completely into cash is predicated by a change in a client's financial objectives or circumstances, such as a lower attitude to risk or deterioration in health. This doesn't seem to be the case here and I would suggest that you ask your bank for the rationale behind its recommendation, particularly as you would also lose your existing Isa wrappers.
However, your bank is probably right in one regard. Everybody should have at least some money in cash to meet any short-term needs or requirements without the necessity of encashing longer-term investments. It could be that you put some of your investment portfolio in cash or start building cash savings from any residual money you have available from your monthly pension.
You have been very sensible in putting your investments into tax-efficient Isa wrappers and, similarly, you should aim to put any cash savings into cash Isa wrappers as all interest would be tax-free. The annual cash Isa allowance for 2013-14 is £5,760.
While savings in cash will protect your money in absolute terms, the interest rates on most accounts are so pitiful that you are likely to be earning less than the rate of inflation, even with a cash Isa, so you will be losing money in real terms.
The only way that you will be able to generate real returns is to take some risk.
You have a big exposure to fixed-interest holdings. This reflects your cautious attitude to risk. However, there is a strong argument that fixed-interest investments are expensive and could potentially lead to significant capital losses. We have been reviewing our clients' fixed-interest holdings and, in many cases, we have moved some fixed-interest assets to cash if clients are nervous of risk, or equities if they are prepared to take more risk.
Just because an investor has a cautious attitude doesn't mean all of their holdings must be low risk, but rather that any riskier investments must be held in appropriate proportions.
I think you should hold a combination of cash, equities, fixed interest and property. Cash and fixed interest should be the largest holdings. I would recommend using strategic bond funds to get fixed-interest exposure as fund managers have the flexibility to position their portfolios to take advantage of where they see the best opportunities, and hopefully avoid the biggest pitfalls. Recommended funds include Fidelity Strategic Bond, Henderson Strategic Bond and Kames Strategic Bond.
Equity exposure should focus on more broad-based rather than specialist funds. Those to consider could include HSBC FTSE All-Share Index, Cazenove UK Opportunities and M&G Global Dividend.
Property can provide further diversification benefits and the focus here should be on good-quality funds investing in physical 'bricks and mortar', such as Ignis UK Property and M&G Property Portfolio.
Before handing control of your portfolio to your son, you need to decide whether he is suitably experienced and qualified to manage it on your behalf. If not, you should seek professional independent advice.
