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Working your portfolio hard without a real strategy

Susan is investing aggressively for her retirement. But our experts think she doesn't need to take as much risk to meet her goals
Working your portfolio hard without a real strategy

Susan is 53 and has been investing for three years. With a medium-to-adventurous risk profile, she says that she reckons she and her husband have 12-15 years to sort out a decent pension pot of £1m to £1.5m.

She says: "We have had individual savings accounts (Isas) since the early days, but were unable to contribute much to them until I inherited a substantial amount three years ago.

"I need to grow what we've inherited aggressively. I don't mind volatility, but really need to maximise growth over the period.

"I take care of our investments because I'm detail-oriented but decisive, while my husband is good at the tax angles and can explain all the ins and outs of how some of the products work.

"I usually make between 10 and 30 trades a month, depending on whether the market is going down (buy lots) or going up (sell the duds).

"I'm concerned that, while I'm trying to put together a well-balanced portfolio of gold-plated products, I'm not getting the cost-benefit balance quite right. I'm particularly concerned that my direct shares might not be worth the bother - am I better off putting that money in XMWO or one of the other funds?"

In addition to their investment portfolio of more than £750,000, Susan and her husband have £100,000 in cash deposits and two buy-to-let properties.

Reader Portfolio
Susan 53

Pension pot


Growth portfolio


Name of share or fundTIDM or ISIN codeNumber of shares/units heldPriceValue
Invesco Perpetual Monthly Income Plus AccGB00330288863,186274.3p£8,739
iShares Emerging Markets Local Government Bond UCITS ETFSEML154£55.80£8,593
iShares £ Corporate Bond UCITS ETFSLXX15012,679.16p£19,018
UK Growth Equity  
Schroders UK MidcapSCP5,603410.75p£23,014
Cazenove UK Opportunities A AccGB00072180676,199411.15p£25,487
UK Value Equity  
Temple BarTMPL2,1471,185p£25,441
Vanguard FTSE UK Equity Income Index AccGB00B59G4H82101£205.15£20,720
Finsbury Growth & Income TrustFGT8,885497.75p£44,225
Lowland Investment CompanyLWI2,1901,289p£28,229
UK Small Companies  
Henderson Smaller Companies Investment TrustHSL4,435485.5p£21,531
Standard Life UK Smaller Companies TrustSLS7,367294.25p£21,677
Cazenove UK Small Companies B AccGB00310929428,409270.87£22,777
World Growth Equity  
db X-trackers MSCI World TRN Index UCITS ETF 1CXMWO2,9132,515.15p£73,266
Bankers Investment TrustBNKR7,662560p£42,907
Jupiter European Opportunities TrustJEO4,970427p£21,221
First State Global Emerging Markets Leaders AccGB00338739196,831415.1p£28,355
Aberdeen New Thai Investment TrustANW2,605419p£10,914
First State Asia Pacific Sustainability A Acc GBPGB00B0TY6S223,303289.03p£9,546
World Value Equity  
Powershares FTSE RAFI US1000PSRF2,460820.25p£20,178
Securities Trust of ScotlandSTS20,372156.5p£31,882
Aberdeen Asian Income FundAAIF8,407211.5p£17,780
iShares Asia Pacific Dividend UCITS ETFIAPD6312,092.3p£13,202
Vanguard FTSE All-World High Dividend Yield UCITS ETFVHYL332£31.74£10,537
World Small Companies  
F&C Global Smaller Companies Investment TrustFCS5,919813p£48,121
Aberdeen Asian Smaller Companies Investment TrustAAS3,270905.5p£29,609
HSBC FTSE EPRA/NAREIT Developed ETFHPRO1,9771,325p£26,195
iShares UK Property UCITS ETFIUKP1,948489p£9,525
Biotech Growth TrustBIOG5,740404.5p£23,218
UK Shares
Schroders UK MidcapSDR2022,500p£5,050
Standard CharteredSTAN2831,598p£4,522

Source: Investors Chronicle as at 7 August 2013


Chris Dillow, the Investors Chronicle's economist, says:

I like your interest in lower-cost vehicles such as exchange-traded funds (ETFs) and investment trusts, rather than unit trusts with high management charges. This obeys one of the key principles of investing: minimise fees.

I also like your large holding in a global equity tracker ETF. This makes sense because the average investor must (by definition) hold an average portfolio, which means holding a tracker fund. And most of us are more or less average (in terms of our investment interests!), so a tracker should at least be a decent part of our portfolios. You're right to consider increasing your holding of them.

But this portfolio probably isn't as well diversified as you might think, simply because most of its components are correlated with the global equity markets and hence with each other. This isn't your fault, though. It's rather a nasty fact about equities generally, that it's hard to diversify well across them. For this reason, it's not clear what a Japanese or European ETF would add.

However, I'm not sure you need aggressive growth to get a pension pot of £1m-£1.5m. To get this portfolio up to £1.3m (in today's prices) requires a rise of 70 per cent after inflation. Over a 12-year period, this requires annual real growth of 4.5 per cent. That isn't especially demanding.

Let's assume shares are fairly priced now, so that dividend yields don't change. And let's assume that dividends grow at the same rate as corporate profits, which in turn grow at the same rate as the real economy. It's reasonable to suppose the latter will grow by around 2 per cent a year over the medium term. If we add to this a yield of 2.5-3 per cent, then we can expect a real return of 4.5-5 per cent a year.

Of course, there are all sorts of risks to this; based on annual volatility of 20 per cent, there's a one-in-six chance of no returns at all over 12 years, for example. But these risks are symmetric; there's also a one-in-six chance of a returns of more than 140 per cent. On balance, I don't think you have to be especially aggressive - a heavy exposure to equities and moderate luck should be sufficient.

This is especially true because it's possible that annuity rates will rise; in fact, bond markets are pricing this in. A one percentage point rise in annuity rates would reduce the pension pot you need for a particular income by £200,000. It's possible, then, that you don't need as big a pension fund as you think - although, of course, the pensions industry isn't killing itself to point this out to folk.

It's possible that, in one sense, your aggressive stance is counter-productive. I'm referring to the fact that you seem to trade very often. Research shows that this is a bad idea. A classic paper by Brad Barber and Terrance Odean, two Californian economists, found that people "pay a tremendous performance penalty for active trading". The reason for this, they say, is that folk are overconfident; they overestimate their ability to spot good stocks. When you say you are better educated and informed than average, I fear you might fall into this camp. You're forgetting that knowledge of the past and present does not confer knowledge of the future, as this is largely unknowable.

Two things, however, make me moderate this harsh judgment. One is that you are a contrarian buyer; it is often a good idea to buy when the market falls, as long as such falls are due to increased risk aversion, which is usually the case. The other is that you sell duds when the market rises. Cutting your losses is usually a good idea, because there is often momentum in share prices, with falls leading to falls. However, this is a case for selling poor performers regardless of market conditions.


Philippa Gee, managing director of Philippa Gee Wealth Management, says:

I appreciate the need to grow the capital fairly aggressively and that you are aware of the shorter-term risks of doing so; however, I feel that you are working the portfolio very hard but without a real strategy to pull it altogether.

You clearly respond well to markets, as you sell down those that need shifting in rising markets and buy when markets have fallen. This alone sounds such a simple matter; however, while most people accept the principle, they fail to action it at the time.

What I would suggest is a twofold strategy. First you agree a longer-term investment strategy, with the asset classes you feel represent value over a longer period of time and then break that down further. So, for example, your equity allocation might be (purely as an example) around 70 per cent and then you spread that between different regions of the globe. This gives you a fairly permanent plan.

Your second step is identifying more temporary changes that fit within it, so you take your asset allocation and decide by how much that can alter when markets are changing. Using the equity holding again as the example, you could say that 70 per cent is the long-term aim; however, you are willing to increase or decrease it by 10 per cent (or more) to correspond with shorter-term opportunities or threats.

Once you have spent the time putting this strategy in place, with the help of a few spreadsheets, it becomes a lot easier to manager over time and gives you ongoing control with the portfolio. This should help alleviate the micro-management of your portfolio and allow you to step back to keep the overall focus intact.

It is not clear what type of contract you are using to hold these funds, whether you have placed the money into a pension, Isa, or any other type of product. But it is absolutely crucial to get this right at this stage. Of course, the product must suit you and your investment needs, but it will determine how much you reduce the amount of tax liabilities you might create as you go along and the way you might then take an eventual income from the assets at retirement.

Secondly, you need to get the right system or platform, in terms of how you place trades and the relevant charges imposed for each transaction. Considering your plan of undertaking a fairly significant number of trades each month, you need to make sure you have a keenly-priced system, so that you are not eating away at any potential growth.

Moving on to the issue of the charges of the investments themselves, you raise the concern of whether you are getting the cost benefit right and this is another common query for many investors. Whatever cost you are paying with your investments, the crucial part is how that links into returns. If you become so focused on cost above all else, you've lost the focus of your portfolio. I am not saying that costs are unimportant, but unless you have an overwhelming need to concentrate on them above all other aspects, then there are other issues to consider first and foremost, and then you can closely analyse the charges at the pertinent point.

Before you make further decisions about individual stock selection, you need to just take a step back and consider how you are holding the investments and the impact that will have on your future wealth creation. You then need to set up an overall strategy to help you when it comes to the individual stock and fund selection. With these basics in place, you should have a stronger foundation to push forward.