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Two months to sort my messy £450k portfolio

Rob is about to retire on investments worth £352k and has £130k cash to invest too. A financial adviser has offered to manage the portfolio but Rob would rather do it himself.

Rob Ferguson is 60 and has been investing for 25 years. He has £215,000 in a self-invested personal pension (Sipp) and £100,000 invested in individual savings accounts (Isas).

Reader Portfolio
Rob 60

Sipp & Isa


Income of £2,100 a month

"My wife is is 55 and is a part-time teacher earning £18,000 a year," says Rob. "I am still working, although my job is not safe.

"I pay myself dividends and a wage from my limited company. This has worked well in recent years, and I have funds and shares under the company name which are approximately £43,000 in value. There is cash within the company of about £100,000 which I intend to extract and invest in my Sipp during the coming year.

"I also have £30,000 in my current account ready to invest.

"It is all a bit messy but I hope to get it sorted and into my Sipp and Isa accounts this year. Then I could have over £450,000 invested by the end of the year.

"We hope to earn £2,100 a month from our investments, which will give us total income of £3,500 a month. I have no preference about whether I make this via capital or income gains.

"My capital may have to take a hit to generate the £2,100 in the early part of my retirement and I'm happy for that to occur, as our children will get the proceeds from our house when we die. If I could make around 6 per cent on my investments a year that should preserve my capital.

"I am trying to decide whether to entrust over three-quarters of our savings to a financial adviser who will charge 1 per cent a year to invest my Sipp into a Standard Life Investments global index fund which will make 5 to 6 per cent a year. I would prefer to go it alone as I enjoy investing, but would hate to lose the capital I have accumulated over the years for both my wife's and my own sake.

"I think I can beat this 4 to 5 per cent a year easily looking at some of the funds and investment trusts available, although I have read a couple of Investors Chronicle Portfolio Clinic articles recently that indicate 5 to 6 per cent a year is about what I could expect to gain over the long term.

"Until now I have had a high risk appetite and lost money in some years, but now that my retirement is nearing I've got to be sensible and use the most suitable funds, investment trusts and exchange traded funds (ETFs) to achieve my aims. I've used ETFs over the past four years very successfully by following the old adage, 'sell in May and go away, don't come back till St Leger Day'. It certainly worked this year.

My last trade was buying Edinburgh Worldwide Investment Trust (EWI) and before that Edinburgh Investment Trust (EDIN).


Name of holdingValue £% of portfolio
iShares FTSE 250 UCITS ETF (MIDD)98,69228
iShares Core FTSE 100 UCITS ETF (ISF)102,74429
UBS ETF MSCI Japan hedged GBP UCITS ETF (UC62)16,0045
PowerShares FTSE RAFI US 1000 UCITS ETF (PSRF)15,7404
Edinburgh Investment Trust (EDIN)21,0596
Edinburgh Worldwide Investment Trust (EWI)19,9986
First Property (FPO)11,6333
Inland Homes (INL)6,7262
LGO Energy (LGO)3,2371
Roxi Petroleum (RXP)10,5723
Stobart (STOB)5,1431
Tethys Petroleum Ltd (TPL)7200
Arbuthnot Banking (ARBB)3,2601
Barclays (BARC)5,4622
Taylor Wimpey (TW.)3,0411
Barratt Developments (BDEV)3,0111




Source: Investors Chronicle, as at 28 October 2015



Chris Dillow, Investors Chronicle's economist, says:

There's a lot I like about your approach. You recognise the value of tracker funds. You've avoided high-cost actively managed funds. You have realised that you can create income by selling shares. You're willing to draw down capital in retirement. And you've even been practising seasonal investing.

All this encourages me to think that you can indeed invest for yourself without wasting money on advisers' fees, with some tweaks to your portfolio.

Caroline Shaw, head of fund & asset management, Courtiers Asset Management, says:

The assets held are only one piece of the jigsaw, meaning you may need some professional advice with the other pieces, such as tax, so as not to waste the time and effort spent on building your portfolio.

If you do not want to entrust your assets to a professional you should take some time to ensure you have appropriately classified your attitude to risk and aligned your investments with this. Some exposure to fixed interest is needed in order to reduce your portfolio risk to the level you say you are comfortable with. You may want to consider the time needed to appropriately research and monitor your investments, and decide whether freeing up your time in retirement is worth an adviser fee.

Jason Stather-Lodge, chief executive officer and founder of OCM Wealth Management, says:

An adviser would also help you navigate the new flexi- access drawdown rules that apply to pension funds, and explain how to take withdrawals in the most tax-efficient manner.



Chris Dillow says:

Let's assume total equity returns will average around 5 per cent a year after inflation. This is what they have been historically. It is also derived from some simple maths.

Assuming the market is fairly valued dividend yield will stay around 3.5 per cent. Let's also assume that dividends rise in line with real gross domestic product (GDP), which grows at 1.5 per cent a year. This is a little below its long-term historic average to allow for the possibility that growth might be lower in future than it has been. On these assumptions, we'll get real total returns of 6 per cent: 3.5 percentage points from dividends and 1.5 per cent from price appreciation.

>History shows that Halloween is a better buy signal than St Leger day.

Now, you say you want to take out £2,100 a month from your portfolio. If you were fully invested in equities you could achieve your target income with only a tiny loss of capital each year on average.

However, this ignores risk. A 100 per cent weighting to equities has a roughly one-in-six chance of losing 15 per cent in a 12-month period. You might find this too big an exposure. The obvious solution is to hold some cash, and/or bonds or gold,. This reduces the risk of large losses, but at the expense of ensuring more small drawdowns if you are to take an income of £2,100 a month. For example, having 20 per cent in cash and assuming a zero real return would give you an overall average total return of 4 per cent, implying an average loss of capital of just over 1 per cent a year. But it would also reduce your risk.

You have therefore a choice: a small but certain drawdown in capital if you have a high cash weighting; or the danger of a large capital loss with a high equity weighting.

You can, however, tweak the odds a little in your favour. One way is to invest seasonally, selling in May and buying again on Halloween. History shows that Halloween is a better buy signal than St Leger day. Amazingly, all of equities' outperformance of cash has come between November and April. This increases average returns mainly by reducing the frequency of big losses, which are more likely to occur in summer than winter. Beware, however, of dealing costs here.

Another possibility is to tweak your equity portfolio towards factors with a proven track record. We know that there are three types of stock that have outperformed on average over the long run: defensives, value and momentum. Sadly, very few stocks possess all three qualities! You can invest passively in two of these strategies, via iShares UK Dividend UCITS ETF (IUKD) or iShares MSCI World Momentum Factor UCITS ETF (IWFM). Alternatively, when you buy individual stocks, you can easily screen them for these three factors with Investors Chronicle's stock screen.

Caroline Shaw says:

Overall your portfolio is a contrast of investment styles with no coherent strategy. You are an average risk investor yet this portfolio carries above-average risk, with no exposure to alternative assets or fixed income.

I would not recommend adhering to the 'sell in May and go away, don't come back till St Leger Day' theory. Being out of the market yet having a return requirement of 6 per cent can be a painful experience. One missed day of equity returns can be costly, and successful market timing of exits and entries is impossible to do consistently well.

You need to be clear what your objectives are, structure your investments accordingly, ensure tax efficiency, assess your risk profile, and plan your income and expenditure requirements pre and post retirement.

Jason Stather-Lodge says:

Your capacity for loss is significantly different to your tolerance of volatility, in that you do not really have the capacity to take significant losses on the portfolio.

Your biggest risk is that you outlive your wealth, or have to make drastic changes to your lifestyle in later years if the capital value has reduced. You also need to maintain the tax efficiency of the portfolio and minimise the tax on any income you take.

A well-drafted plan would consider the impact of taxation and inflation and show the target return required from your invested assets to meet the shortfall in your income. This is the starting point when deciding on the right asset allocation for your funds. This plan would also account for changing income, and show the impact changing growth rates and total charges can have on portfolio returns.



Jason Stather-Lodge says:

You are 100 per cent in shares which is high risk and not suitable for going into drawdown.

Based on your age, tolerance to volatility and investment experience you could adopt a bias towards equity investment, but we would strongly advise that you diversify the portfolio. You should also have a targeted outcome in mind and look to protect capital values in times of high volatility, balancing your need to get a return and protect capital.

We would build a portfolio that uses active and passive assets, and that differentiates between those needed to generate an income within the coming three years, and those that can be invested in for longer.

 Jason Stather-Lodge's suggested asset allocation

Asset% of portfolio
UK equities15
European equities20
US equities15
Indian equities7.5
Japanese equities5
Emerging markets funds2.5
Commercial Property15
Fixed Interest20


Commercial property historically, with the exception of 2008, has not been correlated with equities and so offers some protection against stock market volatility. I suggest a fund that invests directly in property (rather than property shares), which should make a steady contribution of yield and growth of about 6 per cent a year.

I would add fixed interest via a strategic bond fund that can invest in higher-yielding corporate and specialist bonds. Government debt and corporate bonds are unlikely to be able to deliver a contribution that is meaningful over the coming 12 months.

Your UK, European and UK equity exposure should have a balanced diversification between mid and large caps.

Emerging markets and Asian equities will provide some long-term inflation protection. I would aim to build a portfolio that focuses on gaining exposure to industrials, financials, consumer discretionary, telecoms media and technology, banks, and healthcare, as these sectors are expected to outperform in those regions.



Caroline Shaw says:

Carefully consider the tax on income generated and how best to use tax-efficient investments, your wife's pension and state pensions. Also consider the tax associated on money withdrawn from your company, and taking full advantage of the dividend tax-free allowance of £5,000 each a year as well as Isas and Sipps.

Jason Stather-Lodge says:

When looking to get your company money into pensions consider the annual limits on pension contributions. These are linked to an overall cap of £40,000 in each input period, usually the tax year, but which was £50,000 in the previous three tax years.

Depending on the level of income and use of carry forward of unused allowances in the three previous input periods, it may be possible to get £143,000 into your pension. There is no requirement to take it as taxable income and then pay into a pension, as employee and employer National Insurance would be a tax drag on that. But if taken as a dividend it would not create the taxable income needed to maximise the contribution.

Doing a full pension contribution is not the only answer. Also consider retaining some in the company and paying some into pensions, or keeping it all in the company. If the asset is retained inside the company and extracted progressively as taxable income within the National Insurance and income tax allowances, it is effectively tax efficient to withdraw over the coming years. This could be more flexible and tax efficient from an income perspective, with the regular income used to utilise income tax nil rate and 20 per cent allowances. But this would mean having to continue doing corporation tax returns as well as not benefiting from tax efficient growth inside the pension.

*None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.

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