Setting off on a sensible footing

He and his wife also have:

■ £15,000 in a cash Isa.

■ A whisky collection currently valued at £9,000.

■ A house currently worth £550,000 on which they have a 30-year repayment mortgage of £279,000.

"As I am relativity new to investing, a few months ago when I made my first purchases, I only committed relatively small amounts of money to each investment, and as such have a few holdings that will require attention at some point," says Adam. "However, I felt the best way to get a feel for investing was to start making a few purchases and become comfortable with the process. I am now ready to commit to larger holdings that will hopefully form the core of a balanced portfolio.

"I would like a mix of growth and income from my investments until retirement, when I will hopefully be able to sell some investments or partially use dividends to provide additional income.

"I aim to balance my portfolio with some more reliable core holdings via exchange-traded funds (ETFs), investment trusts and direct equities, ideally avoiding too much duplication of holdings. I would appreciate any suggestions on what to add to my portfolio.

"I have £5,000 set aside for investing immediately, after which I have £150 a month to invest. I also invest £100 a month into my separate private whisky collection, and I am prepared to increase or decrease either of these amounts as required.

"Although I would like to think that our investments might help with future costs such as university fees, this is not my primary reason for investing. Rather, I hope to get better returns from some cash we had in an Isa generating almost no interest.

"I have a medium to high risk attitude, especially regarding speculative investments where I have not invested a huge amount of money. I am happy to take this risk at the moment because of my age - I hope that the investments will pay off over time - and because I aim to balance my portfolio. I would be happy to put a small portion of it in high-risk ventures.

"I want to enjoy investing and hopefully make some good investments which will provide me with additional income without taking up all my time. But I enjoy researching potential investments when time allows.

"I recently bought Fundsmith Equity (GB00B41YBW71) and sold my holdings in Persimmon (PSN) and Cohort (CHRT) after making a good profit.

"I have on my watchlist Bacanora Minerals (BCN), BAE Systems (BA.), Lloyds Banking (LLOY), Next (NXT) and The City of London Investment Trust (CTY)."

Adam's portfolio

Source: Investors Chronicle

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

I would caution you against having a bias to speculative stocks. I say this not because of their high risk profile, but rather because their risks don't pay off on average. Since its inception in May 1995, the Alternative Investment Market (Aim) - a gauge of speculative stocks - has fallen by more than 30 per cent, during which time the FTSE All-Share index has risen more than 70 per cent.

This massive underperformance has occurred because investors have paid too much for speculative shares. This is partly because some of them have lottery-type preferences - they want to get rich quick - and partly because they underestimate the huge barriers to corporate growth. Technologies can fail, good ideas can be replicated by rivals and managers can fail to control costs as the business expands. It is very rare for companies to get very big. This fact warns us that a bet on speculative stocks is a bet against history and economics.

However, you have a high appetite for risk. And this might be justified by the fact that you and your wife are both in relatively safe jobs: because you aren't taking much risk with your human capital, you can afford to with your financial capital. So, what's a better way to do this than chasing speculative stocks?

Textbook theory says you should simply hold less cash than the average investor and more equities in general - via a tracker fund. Although there isn't a return premium on speculative stocks, there is on mainstream equities: over the long run, they outperform cash. As things stand, however, most of your financial assets are in cash - which is an unusually conservative position.

A second possibility is to hold defensive stocks. In fact, you're already doing this. CF Woodford Equity Income Fund (GB00BLRZQ737) has a strong bias to defensives such as big pharmaceuticals and tobacco. History tells us that defensives outperform on average over the long run, in part for the same reasons that speculative stocks underperform: investors under-rate the virtues of get-rich-slow strategies and the benefits of investing in stocks with big quasi-monopoly power. Warren Buffett, who owes much of his fortune to investing in defensives, has said that he looks for businesses with moats around them - things that stop them being attacked by competitors. Big defensives have moats - such as brand power - but small speculative stocks often don't.

You might, however, think that defensives are a little dull - although this is precisely their virtue. And they would very probably underperform if or when the market generally recovers.

Petronella West, director - private clients at Investment Quorum, says:

Your long-term goals are focused on achieving financial freedom in your mid 60s when your pensions become payable and the mortgage is paid off.

Initially we would encourage you to work out what level of net income you require at retirement. This should include essential expenditure, bills and food, as well as discretionary expenditure such as holidays.

We suggest that this figure is projected to age 65 to work out the capital sum required to support this income level. Given that we normally overestimate our investment returns, and underestimate our life expectancy, a financial plan is crucial. This will then allow you to make a sensible decision about how much to invest and your appetite for risk.

Your investment objective is to grow the portfolio through a growth and income strategy, and while you might need to de-risk your portfolio nearer retirement this might not be the right strategy given increased life expectancy.

The long-term effect of compounding is more pronounced on a larger sum of money, generally accumulated later in life. For this reason you might wish to preserve capital once your earnings cease, but also ensure your money keeps pace with inflation.

It makes sense to have some cash reserves so that you can reduce your income when investment returns are lower or negative - and have some liquidity for any unforeseen events. Taking income from a portfolio in stock market downturns can further compound portfolio losses.

Given your age, we would recommend investing the £15,000 that is currently in a cash Isa into an equity Isa, allowing that to grow over time. Isas are good long-term tax wrappers that shield growth from capital gains tax (CGT) and higher-rate tax. This is generally most effective in a higher-risk portfolio exposed to stock market risk as opposed to cash.

Investing in strategic and tactical strategies is often best left to experts, such as professional fund managers, given the daily volatility in today's market. This will allow you to focus on saving as much capital as you can afford, given your age, so that over time it will grow into a significant amount.

Therefore, we would strongly recommend that you speak to an adviser so they can plan out a clear and precise strategy for you: this would mean that as you enter retirement your capital would have grown sensibly.

You should try to reduce the term of your mortgage from 30 to 25 years: given an average interest rate over the life of the mortgage of 3 per cent a year this could save up to £41,000 of interest over the life of the mortgage. Regrettably, this fact is very often overlooked. Also, if you consider a property move in a few years' time, cutting down the term is a good long-term savings plan.

Ben Yearsley, investment director at Wealth Club, says:

Why aren't all your investments held in the Isa? There is no reason not to have everything in an Isa.

Secondly, you should only consider direct shares if you have the time to monitor them properly and you have a spread of about 15 to 20. And all your shares seem to be particularly high risk. Why do investors starting out often gravitate towards high-risk resources companies? The answer is probably the 'get rich quick' mentality. It could also be the 'buy the share that has fallen the most' mentality as well. But investment is for the long term.

If buying direct shares, an investor needs to be on top of announcements as and when they come out, especially with higher-risk small-cap stocks - the market is quick to punish negative news - and if you miss a couple of days your capital can get quickly eroded. Also, when dealing small monetary values of shares, costs quickly eat into your investment.

So you should sell most of your direct share portfolio and concentrate on collective investments such as investment companies and funds for the time being.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

If you have a high risk appetite an option is those segments of the market where risk might be rewarded, such as cyclical stocks. These tend to do well over time, rewarding investors for the risk that they'll do really badly in recession. Because you are in relatively non-cyclical jobs, you can afford to take such a risk.

Another such segment is emerging markets: these do well in good times to compensate for their tendency to do really badly in bad times.

These two segments are very similar: commodity stocks are the most cyclical and these are hugely correlated with emerging markets.

Luckily, there is a rule that helps to spot when to buy both of these. You should buy them when their prices rise above their 200-day moving average: this is because both miners and emerging markets are prone to momentum effects. For now, this buy signal is absent. This will change at some point, though, in part because the moving average has fallen. When it does, more risk-tolerant investors such as you should consider emerging markets or commodity funds.

Petronella West says:

We are advocates of investing in collective funds, ETFs and investment trusts rather than direct equities, as these can minimise a portfolio's volatility and risk. We also believe that diversification will help smooth out performance over time and avoid stock duplication: for example, in the UK you should consider having exposure to small- and mid-caps alongside an allocation to larger companies.

Therefore, we would suggest funds such as Franklin Templeton UK Smaller Companies (GB00B7FFF708), Neptune UK Mid-Cap (GB00B909H085), CF Miton UK Value Opportunities (GB00B8QW1M42) and Vanguard FTSE 100 UCITS ETF (VUKE). Likewise, it is possible to diversify across geographies to benefit from globalisation.

Given the current size of the portfolio, and the initial £5,000 available for investment, it might be prudent to consider investing into a multi-manager fund until the capital sum grows to a meaningful amount. Your current portfolio is small in valuation terms, and as advocates of buying funds we would suggest that you sell your smaller direct holdings in favour of good quality funds.

Ben Yearsley says:

There is crossover in terms of underlying holdings between CF Woodford Equity Income and Woodford Patient Capital Trust (WPCT). With a relatively small portfolio this doesn't make sense. If you are truly a long-term investor and prepared to wait seven to 10 years, then Woodford Patient Capital is a suitable investment - in which case you don't really need CF Woodford Equity Income, so would be better off selling it and diversifying elsewhere. Fundsmith Equity has been in the sweet spot over the past few years so that now might not be an opportune time to invest, but it still has a good manager with a disciplined process.

If you sell the individual shares and Woodford Equity Income you will have just over £3,000 to invest plus your monthly savings. I would split this three ways between:

■ an equity income fund,

■ a global smaller companies fund to balance out Fundsmith Equity, and

■ a UK growth fund.

The funds I suggest are JO Hambro UK Equity Income (GB00B95FCK64), Standard Life Investments Global Smaller Companies (GB00BBX46522) and Jupiter UK Growth (GB00B54CH949). I would then split the monthly investment between two or three of these funds.

Over time as you have more to invest you could consider adding a direct share element again, and more diversity with different regions.

I don't mean to be unduly harsh, but I would rather you started on a sensible footing from the outset.