Don't trade away long-term gain

Suresh has lived in the UK for 14 years, but was born in India where he still has family to whom he regularly transfers small amounts of money.

"I have been investing for five years and am aiming for long-term capital growth," he says. "I have an Indian fixed deposit worth about £15,000, which earns interest of on average 6.5 per cent, although with currency fluctuations and transaction costs that level of interest is not guaranteed.

"I also pay into an NHS pension and as it may hit the maximum lifetime allowance (currently £1m) I have not invested in a self-invested personal pension (Sipp). However, I have about £1,000 a month excess cash that I could invest. I have already used up my annual Isa allowance, so should I invest in stocks and shares outside my Isa, open a Sipp, or open a stocks-and-shares Isa in my wife's name?

"I also have cash in UK accounts worth about £15,000, but which only earn interest of about 1 per cent.

"I will probably retire around 68, depending on NHS rules. I don't have specific retirement objectives, but am likely to require an income of about £2,500 a month to live comfortably.

"We are also expecting our first child and would like to invest to cover future costs such as education.

"I think my attitude to risk is balanced: I would be prepared to lose about 10-20 per cent, but if I lost more, I would get twitchy about my investment strategy. However, I don't think I will require the money in the portfolio for the next 20 to 25 years.

"Most of my funds are for long-term growth and I reinvest the income from them. But I invest in shares and sometimes exchange traded funds (ETFs) with short-term gain in mind. If they make a profit of about 10 per cent, I tend to sell them. If they fall, I just wait for them to go up again.

"I invested in Genel Energy (GENL) and Premier Oil (PMO) when their share prices fell about 50 per cent, believing they would turn around. But I then lost a further 70-80 per cent on them. I still hold them in the hope that they will go up again.

"I also tend to sell at least part of a holding when it goes up by about 25 per cent, as I believe that it will go down again, meaning I can buy more at a cheaper price.

"For example, I sold CF Woodford Equity Income (GB00BLRZQC88) when it went up about 16 per cent and bought more units with that money when the price went down. But this strategy failed with Newton Global Income (GB00B8KT3V48), which continued to go up after I sold it, meaning I missed out on further growth of 20 per cent.

"Polymetal International (POLY) and BlackRock Gold & General (GB00B99BDY18), meanwhile, are down 20-30 per cent since I bought them. I also still hold these as I don't like crystallising losses, and think they will pick up again.

"As I top up my investments with funds every year and make multiple trades it is difficult to know how much my portfolio has made in returns overall.

"Making short-term gains and then investing the profit for the long term provides me with some excitement, but is my overall portfolio geared towards long-term gain? Are there any investment areas I have missed and can explore?

"I tend not to invest in bonds as I have read too many times that they are in bubble territory, and my US exposure is low as I understand stocks listed there are overvalued.

"Recent trades include selling half of my ITV (ITV) holding worth about £1,500 for a profit of £150. I kept some of my ITV shares because I think it will go up, and could be a takeover target due to the weak pound.

"I also bought Scottish Mortgage Investment Trust (SMT) shares worth £1,000. I had originally held shares in this investment trust worth £2,000 and made a profit of about 30 per cent on them, at which point I sold some of them. But I think this is a good trust and will top it up when its price drops. I also topped up Worldwide HealthCare Trust (WWH) by £1,000 after its share price dropped.

"For short term gains, I have on my watchlist: GlaxoSmithKline (GSK), Centamin (CEY), Burberry (BRBY) and Shire (SHP).

"For long-term investment I am considering: Witan Investment Trust (WTAN) and ETFS ISE Cyber Security GO UCITS ETF (ISPY).

Suresh's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You ask whether your portfolio is geared towards long-term gain. I don't think it is - certainly not to an optimum degree - because you're making some common mistakes.

You're betting against an important market trend. You say that if you make a 10 per cent profit you tend to sell. But this is a bet against momentum - the tendency for stocks that have risen to continue rising, on average. It doesn't make sense to make such a bet because we know that momentum works. Run your winners.

You're also betting against downside momentum. You say you don't like crystallising losses. But this ignores the fact that losing stocks often carry on losing. There's a name for the mistake you're making: the disposition effect - the habit of hanging on to bad stocks in the hope they'll come good. On average, this doesn't happen: past losers carry on losing in the short term. Of course, there are exceptions. But when deciding whether a stock is an exception or not there is one fact that is supremely irrelevant - the price you paid for it.

Wishful thinking and a desire not to admit even to yourself that you were wrong can keep you in losing stocks. But both are irrational motives.

A way to correct these bad habits would be to apply a simple rule: hold on to stocks while they are above their 200-day moving average and sell when they fall below it. This isn't infallible, but it'll protect you from the risk of large protracted losses.

You ask what to do with savings beyond your Isa allowance. Try to avoid tax - of course legally - which argues for a Sipp or Isa in your wife's name. If you can really tie up the money for a long time there's a case for a Sipp. Otherwise an Isa in your wife's name - although the future state of your marriage is a consideration here.

Your Indian savings account could do badly. That 6-7 per cent return is a reward for taking risk, some of which is inflation. Economic theory tells us that higher inflation should be accompanied by currency depreciation. With the International Monetary Fund (IMF) expecting Indian inflation to be over 5 per cent, this implies that the rupee should fall a little against sterling. But another danger is crash risk: high interest rate currencies can suddenly fall. This is more likely to happen at times when investors become risk-averse, which means there's a danger that any losses on emerging markets might be accompanied by losses on your Indian cash.

One way to mitigate this risk might be top-quality government bonds. They might be a poor investment in themselves, but they'd probably do well if emerging markets do badly.

Paul Taylor, chief executive officer of McCarthy Taylor and chartered financial planner, says:

As you have a NHS pension a Sipp would not be worthwhile, but using your wife's Isa allowance would be. Saving £12,000 a year will only partly fund her Isa, so take gains from the investments and use the proceeds to fully fund her Isa. You both have annual capital gains tax (CGT) allowances of £11,100 and there is no tax on transfers between spouses. It would make sense, from a tax planning perspective, to transfer part of the portfolio to your wife as she does not pay higher-rate tax.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Your portfolio has a high weighting to emerging market equities. In one sense, this is reasonable: they have both momentum and cheapness on their side. It is, however, a bet upon investors maintaining or increasing their appetite for risk. Should this not happen, emerging markets - even more than other equities - would do badly.

Don't incur high fund fees where it is not necessary. The Financial Conduct Authority (FCA) recently found what economists have long said - that high-charging actively managed funds don't, on average, beat the market. Ask of every fund: does this give me something that I can't get from a low-charging ETF? Often, the answer's no: set yourself a high bar for buying high-charging funds.

Paul Taylor says:

With a small portfolio we would strongly advise against directly held shares as the risk is too high, and they do not achieve sufficient market or sector diversification.

We like ETFs, but there are low-cost open-ended funds that also track the market effectively and cheaply. Vanguard FTSE UK Equity Income Index (GB00B59G4H82) has an attractive yield of 4.6 per cent, a competitive ongoing charge of 0.22 per cent, and is run by an experienced and well-resourced passive manager.

In these volatile times with significant political risk we would also use active funds such as Royal London UK Equity Income (GB00B8Y4ZB91), which has a yield of 4 per cent, a good performance record over the longer term and, for an active fund, a reasonable ongoing charge of 0.68 per cent.

You are overexposed to equities.While we agree that bonds are overpriced this will change so hold some cash for this purpose.

You should add commercial property to diversify the portfolio. Although some of these funds suffered outflows after the Brexit vote, the panic has largely subsided and the situation has normalised. Our preference is for regionally diversified property funds, which are not heavily exposed to London, which continues to face uncertainty over Brexit.

Tritax Big Box REIT (BBOX) invests in big-box distribution centres. Since it launched in December 2013, it has returned 54.7 per cent compared with a sector average of 34.6 per cent and has a yield of 3.1 per cent.

You could add infrastructure exposure with HICL Infrastructure Company (HICL), which has an attractive yield of 4.4 per cent and a good performance record. It focuses on UK infrastructure, a market we favour in this sector, and has an allocation of 39 per cent to healthcare - a UK sector we particularly favour.

We would not buy multi-manager funds as they lack transparency in terms of their holdings and layered costs.

We would currently suggest the following asset allocation for a balanced portfolio:

Source: McCarthy Taylor