Preserving assets and mitigating risk

"I drew a first payment from my Sipp of £7,200 in August last year and although the next is due in August this year, I may postpone it for a while in view of the inheritance tax (IHT) benefits of pensions," says Martin. "I am currently adding £200 per month plus £50 tax relief to my Sipp, and I hope this and the dividend income will cover the £7,200 I took out last year.

"I have a workplace pension which pays £17,197 a year, state pension which pays £9,652 a year and rent from a lock-up shop in Wiltshire which pays £5,500 a year - as well as interest from savings and my individual savings accounts (Isas). The lock-up shop is valued at about £50,000.

"I don't currently expect any income from the Bavarian Forest Holidays business, although the three houses I let are worth about €510,000 (£436,849).

"I also have 50 shares worth £2,500 in GlenWyvis distillery and am waiting to see if they prove to be an investment rather than a bit of fun! But I will get some tax relief on this when I complete my tax return for 2016-17 tax year as it is an Enterprise Investment Scheme (EIS) .

"I am selling my main home in Wales which is valued at about £380,000.

"I am also trying to decide whether I should entrust the management of my investments to a discretionary wealth manager, or switch some or all of it into collective funds. Since my first wife died in 2001 I met my second wife, and we ran business conferences in eastern Europe, and published monthly news and statistics on the timber, pulp and paper, packaging, and printing industries in Russia, other former Soviet States, and central and eastern Europe.

"We also built up Bavarian Forest Holidays.

"This and then my caring for my wife during the last three years of her life left no time for any regular monitoring of my portfolio, so purchases and sales of investments have been sporadic. I look at Investors Chronicle tips from time to time, and recently started to read reviews of the shares I hold.

"Over the last 18 months I have passed on £86,206 - £66,206 of which is potentially exempt from IHT - to the two children from my first marriage and their three children, and my second wife's two children and two grandchildren. I also give £25 per month to each of my grandchildren out of income, and have another grandchild due at Easter.

"I would say that I have a medium risk appetite as I have always viewed investments as long term, although have no feel for what an acceptable loss would be. I have been investing for 15 years - on a larger scale via my Sipp for the last 10.

"I think the balance of my investments, particularly in the Sipp, is wrong. My late wife made substantial and very profitable investments in easyJet (EZJ), Dunelm (DNLM) and Templeton Emerging Markets Investment Trust (TEM). These now form a substantial part of the portfolio but every time I look at reports on them they suggest holding or buying these.

"In January I sold 500 shares in easyJet worth £5,221.30 and shares in Tesco (TSCO) worth £4,894.64. I also topped up my holding in Vernalis (VER) by £2,717.02 and am considering doubling my Alliance Pharma (APH) holding."

Martin's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

Your biggest asset is your Bavarian properties. This should influence how you think about your other investments.

Some of your holdings such as easyjet and Dunelm have hurt by sterling's fall. But that same fall has raised the sterling price of your German property, so net, you're probably better off. Your German property gives you a more diversified portfolio than you think.

This is not to say you should cling to easyjet, Dunelm and Carillion (CLLN), another loser. Stocks that have already fallen tend on average to fall further - in part because investors hold onto them in the hope they'll bounce back - momentum is a very powerful force. So I'd consider cutting them.

And this is one of the main reasons why everyone should regularly monitor their portfolio. Watching your portfolio mostly doesn't make sense, as most of what you'll observe is noise rather than signal, so there is no reason to rejig your investments. But a rare exception is when a stock has fallen, either below its 200-day moving average or over a three- to 12-month period, as there's a higher than average chance of it continuing to fall.

Paul Derrien, investment director at Canaccord Genuity Wealth Management, says:

You are trying to plan for IHT. Pensions can be a fabulous way of passing on assets outside your taxable estate, so if you could afford to avoid taking income from your pension this could help the assets grow in a more tax-efficient environment. You seem to have plenty of cash reserves that could be made to work a little harder to make up this income level if required.

Think carefully about how much time you have and how much enjoyment you will get from monitoring your investments. This will dictate whether you continue with direct equities, move into collective funds, or appoint an investment manager to guide your investment choices and assist with your tax planning.

Rick Landucci, investment manager at Hargreave Hale, says:

You have recognised the need to position your assets to offset IHT liabilities, but there is still work to do and it would be worth considering an IHT portfolio of Alternative Investment Market (Aim) shares. While this would be higher risk than your medium risk appetite it need only account for around 10 per cent of the assets outside your Sipp.

Aim shares only need to be held for two years to be IHT exempt. The greater investment risk will be offset by the 40 per cent IHT saving, effectively meaning the shares could fall by a similar amount without having a net negative impact. But remember that the tax benefits of IHT portfolios are dependent on your individual circumstances and could change.

I cannot see much point in taking any income from the Sipp as it appears you have a decent level of income from outside it, which should cover reasonable everyday expenses. As you are continuing to make contributions to your Sipp from your current income this will help to negate the withdrawal.

You should continue to make Isa contributions to take advantage of this tax wrapper's increasing annual allowance - this has just risen to £20,000 - and assist any further requirement for income.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Having a large, illiquid euro-denominated asset should influence your portfolio in some other ways. It is a good reason for holding cash as it takes time to sell property. It is important to ensure you never become a forced seller of any asset as this is a certain way to get a bad deal. Having liquid assets elsewhere reduces the risk of this calamity.

It also means you should be wary of financial stocks. In crises, property not only loses value but becomes even harder to sell quickly. These are also times in which financial stocks do especially badly. You might think the chances of a financial crisis in the near future are slim - and I'd agree. But the small chance of a disaster is something you should guard against.

And having a large, illiquid euro-denominated asset means you might want a more domestic bias to your shareholdings than the average investor. Many of us would lose if sterling falls, as this would raise inflation. You, however, have a hedge against this, because your German property would rise in sterling terms.

By contrast, if you hold overseas stocks or larger UK stocks that have big overseas earnings, if sterling rises you would lose on both your shares and property. This argues for a bias to small- and mid-cap UK companies, although these carry more than average cyclical risk.

This isn't to say you should dump Templeton Emerging Markets Investment Trust. Just as you should cut losers, you should also run winners. This is perhaps especially true of emerging markets.

You ask whether you should switch into managed funds. The very question might suggest you're not comfortable with individual shares. If so, then you should indeed switch. The default position here should of course be tracker funds: these are in effect low-cost funds of funds. I'd suggest you bias your allocation to a FTSE All-Share tracker, and also have a FTSE 250 tracker to increase your domestic-UK exposure.

Paul Derrien says:

You say you are a medium risk investor and that your goal is to maintain capital value. These two objectives are not natural bedfellows as medium risk, for me at least, would mean an overall equity level of about 60 to 70 per cent in a portfolio. With your current allocation to equities this is not an absolute return strategy aiming for capital preservation.

The key to determining your risk appetite is to work out how much downside you can tolerate with your investments, and from that you will get a better idea of the level of equity exposure you should hold.

The Sipp portfolio in isolation is almost entirely invested in equities - this is high risk. But when we look at your overall asset mix, excluding your home, you have over half your assets in property, around a fifth in equities, and over a quarter in cash or similar. This is more medium risk and there is scope for doing more with the cash - especially given rates of return on deposits.

With the Sipp portfolio you are taking very punchy bets on emerging markets - over a quarter of this - and Dunelm which accounts for more than 9 per cent. Despite this, you have a reasonable spread of investments so some rebalancing would help.

Taking a broad example of a medium risk portfolio, I would suggest initially top-slicing the larger holdings - United Utilities (UU.), Dunelm and Aviva (AV.) - down towards 3 per cent and then deciding what to do about your emerging markets exposure. If you brought this down to 6 per cent of the Sipp, this would give you sufficient cash to diversify the portfolio into alternative asset classes with limited correlations to equity, for example, fixed income, absolute return, or multi-asset funds. With this framework you will be heading in the right direction.

Fixed income is usually considered the natural counterbalance to equity, however in a rising interest rate and inflation environment, it can be a difficult investment choice. A medium risk portfolio, though, is more about balancing risks rather than seeking equity-like returns. So if you are nervous of inflation or rising rates then funds such as NB Global Floating Rate Income (NBLS) could be valuable additions. And strategic bond funds such as MI TwentyFour AM Dynamic Bond (GB00B57TXN82) can be nimble enough to navigate through potentially treacherous fixed income markets.

But don't just look to fixed income to diversify. There are other assets that could reduce your portfolio risk, like green energy production infrastructure funds such as Renewables Infrastructure Group (TRIG). Funds seeking an absolute return could also reduce portfolio risk, for example, Henderson UK Absolute Return (GB00B5KKCX12), or multi-asset investment trusts such as RIT Capital Partners (RCP), Caledonia Investments (CLDN) or Ruffer Investment Company (RICA).

Rick Landucci says:

Given the lack of time you have to monitor your portfolio it could be worth increasing the percentage of it invested in collectives.

Baring Emerging Europe (BEE), Impax Asian Environmental Markets (IE00B3PM1976) and Templeton Emerging Markets Investment Trust have performed and help to diversify the portfolio, including geographically. While emerging markets can be volatile the spread of investments across the funds helps offset risk. However, now might be a good time to consider taking profits in Templeton, thereby reducing your significant exposure to one fund and trimming the largest single holding within the Sipp portfolio.

I would look at reinvesting the proceeds into other geographies such as the US, Canada and Japan, which are all notably missing from your portfolio.

Several of your individual share holdings have performed very well with excellent gains of late, and good dividend income. At the same time, several companies have struggled and, given the strength of markets since the Brexit vote and US Presidential election, it could be worth selling some if not all of these stragglers. Collectives could be the better option for this money as they would provide further diversification.