William and his wife want to grow their wealth over five years and then semi-retire as early as possible after that on an income of £35,000 a year. Aged 42, he has taken an active interest in his investments for the past three years.
He says: "We are probably no different to others in that we are starting to realise that investing is something we can probably do ourselves and not rely on banks and advisers to do it while charging us 1.5 to 2 per cent a year.
"We are different because we want to semi-retire much earlier than most, and think we may be fortunate to have such an opportunity to do this with some sensible planning. I have been very disappointed with the performance of my bank portfolio, so I recently cashed in £250,000 of my portfolio which I invested directly with Ruffer's total return because I wanted an element of wealth preservation in my portfolio.
"I want to continue to move away from my bank and cash in the rest of my bank portfolio and Isa (worth £350,000) and invest this in shares or unit trusts. I would welcome any pointers as to how I should be diversifying - or maybe we are too diversified already?"
Shares and unit trusts
Semi-retire in 5 years' time
WILLIAM'S PORTFOLIO
| Name of share or fund | ISIN or TIDM code | Number of shares/units held |
| Bank – wealth enhancement portfolio including £250,000 Isa | na | £350,000 (70% equity) |
| Bank – balanced portfolio (wife) | na | £600,000 (50% equity) |
| CF Ruffer Total Return O Acc | GB0009684100 | £250,000 |
| Building society savings | na | £140,000 |
| Gold and gold trusts | na | £93,000 |
| Blackrock Gold & General A Acc | GB0005852396 | £18,000 |
| Artemis Income Acc | GB0032567926 | £25,000 |
| Axa Framlington UK Select Opportunities R Acc | GB0003501581 | £15,000 |
| Invesco Perpetual Income Acc | GB0033031260 | £10,000 |
| First State Global Emerging Market Leaders A Acc GBP | GB0033873919 | £5,000 |
| iShares MSCI Japan Small Cap UCITS ETF | CJPS | £2,500 |
| Total | £1,508,500 |
BREAKDOWN OF COMBINED WEALTH (EXCLUDING HOME)
Equity 49%
Bonds 16%
Cash 19%
Gold/mining 9%
Property 4%
Other 3%
Ben Willis, head of research at Whitechurch Securities, says:
You are achieving some diversification from an asset allocation perspective, and one that is in keeping with your stated moderate risk profile. However, you may want to fine-tune your asset allocation further.
You have about 20 per cent of your portfolio in cash. Cash has an important role for reasons of liquidity and security, but with low deposit rates this part of the portfolio is not producing real returns. Consider reducing your cash and putting this to work in other asset classes. However, you must ensure that you leave enough cash for emergencies.
You recently invested £250,000 into CF Ruffer Total Return to preserve capital. The Ruffer fund has certainly achieved this, providing excellent risk-adjusted annualised returns over the longer term. Given that this is a recent investment and that it will be managed in line with your risk profile then leave this position to run.
You mention you are taking an interest in managing your own investments and are looking to cash in the remainder of your bank portfolio (and I am assuming your wife's also). Excluding the recent Ruffer investment and the current cash position, this leaves a portfolio of roughly £1.1m. I would start with an asset allocation framework allowing a maximum limit of 60 per cent equity exposure, with the remainder in a blend of fixed interest and alternative investments.
Starting with your equity positions, you already own some excellent funds. However, I would recommend adding exposure to UK and overseas equity income funds. These can generate total returns through potential growth and reinvested dividends over the next five years, but also can provide a growing income when you decide to semi-retire.
I would continue to hold (and top up) all UK equity exposures and supplement these with complementary UK equity income holdings. For example, you may want to look into funds that focus on small and mid-sized UK dividend-paying companies or contrarian funds that seek out unloved, cheap areas of the market.
Review your existing positions within First State Global Emerging Market Leaders and iShares MSCI Japan Small Cap as they do not make a meaningful contribution to the overall asset allocation (both less than 0.5 per cent). Instead, look at overseas equity income funds, splitting the UK and overseas equity exposure 50/50. I would research broad global equity income funds, regional equity income funds, such as Asian Pacific and Emerging Markets, and single-market equity income funds that invest in Europe, Japan and the US. One fund selection in each category would provide a diversified spread of overseas equity exposure.
Your overall gold positions account for roughly 10 per cent of the portfolio. Although I am not a gold bull, I can see the benefit of holding it for diversification reasons, particularly during periods of heightened risk aversion. However, I would sell the BlackRock Gold and General as it is really an equity proxy.
With the remaining 30-40 per cent, look at both fixed interest and alternative investments. Given the negative outlook for fixed, I would look to hold only a maximum of 10 per cent of the portfolio covering three areas: short-duration bond funds; inflation-linked bond funds and strategic bond funds that have a long-term, demonstrable track record.
For the remainder of the portfolio I would invest in a blend of absolute-return market-neutral vehicles and multi-asset hedging strategies. It is imperative that if you decide to allocate to these funds that you research this area in detail as the sector is very broad, with numerous funds aiming for differing objectives using different investment methods.
Finally, the portfolio will need constant reviews, none more so than when you approach your semi-retirement date as the portfolio will need to focus on income generation and also reflect your attitude to risk, which could well have softened given the forthcoming change in your lifestyle.
David Meckin, managing director of Insight Financial Consulting, says:
With a portfolio in excess of £1.5m, you are already in a position to generate an income greater than your stated needs. By investing in 10-year retail corporate bonds, currently yielding 4.5 per cent per year, you could enjoy a gross annual income of £67,500 which, even after tax, would leave you with well above the £35,000 you need. Inflation would ultimately erode the value of this income, but diversifying into high yield equities could address this problem.
Given that you are prepared to dedicate time to self-investing, there is scope to grow your fund substantially. You say you would like to semi-retire in five years' time, although it would appear there is some flexibility in this goal.
Looking at your portfolio, if the objective really is capital growth, there are two areas that cause immediate concern. First, your exposure to gold. Gold tends to be used as a means of protecting wealth, not creating it. Second, almost 20 per cent of the fund is in cash. At least some of these funds should be reallocated into alternative wealth-creating assets. The two main asset classes that offer the greatest potential for capital growth are property and shares. Exposure to the property market can be increased through direct investment in construction companies and real estate investment trusts.
It appears that you want to focus attention on shares as the main vehicle for wealth creation, both directly and through unit trusts. Pursuing the unit trust route immediately involves the payment of fees, something you want to avoid. Therefore you should confine your attention to building up a well-balanced self-select shares portfolio. Although diversification is key to reducing risk, over diversification is also an issue as it can damage returns. A holding of between 20 and 25 companies is sufficient to enjoy the benefits of diversification, whilst not damaging potential overall returns.
I also recommend you concentrate on UK stocks. Investing overseas exposes you to two risks - business risk (the possibility of the company not performing as expected, which is inherent in buying any share), but also exchange rate risk (exchange rates working against you). Over the last year the London Stock Exchange has delivered spectacular returns for independent investors. A well-diversified portfolio of 20 stocks would typically have delivered an overall annual return of 37 per cent. Of course, such returns cannot be guaranteed, but careful stock collection will help.
I'd advise you draw up a list of companies from a variety of sectors. You should allow for economic cycles, choosing companies that are robust when there's an economic downturn (discount and food retailers) and those that fare well during an economic boom (airlines and holiday companies). You should also include both companies that tend to display consistent trading performance (utilities and pharmaceuticals) and companies that have fallen out of favour but may be able to turn their fortunes around.
Keep £100,000 in cash deposits, to meet unforeseen cash requirements, with the rest divided between equities and retail bonds. The division will depend upon your appetite for risk. Aggressive growth would indicate a portfolio of up to 80 per cent equities, with the remainder in bonds and cash deposits although, given your future anticipated cash requirements, you might want to adopt a slightly less aggressive approach.
