Set some investment objectives and an asset allocation

"A local independent financial adviser (IFA) helped to put together my stocks and shares Isa," says Marjorie. "But I now wonder if the Isa is proving to be a high cost means of achieving low-risk diversification, and whether more self-managed alternatives would be feasible. This is because as well as the IFA, the management of the Isa now also involves wealth manager Brooks MacDonald, which is moving this portfolio from the six existing funds to the 21 set out below. This creates three layers of commission - the IFA, Brooks MacDonald and Cofunds investment platform - plus the funds' own costs.

"I am risk-averse and currently lack the financial understanding to venture beyond bank accounts. But I am interested in developing a basic stock-market understanding and think that a spread of investment trusts and individual shareholdings may be an alternative way forward. This could include the cash accounts I currently have, as well as a stocks and shares Isa.

"Following previous discussions with friends in an investment forum who meet to discuss opportunities, I came up with a hypothetical portfolio of 20 investments with around £5,000 in each. These investments seem to have performed reasonably well since, but are these now overvalued due to the FTSE 100 hitting new highs this year."

Marjorie's portfolio

Marjorie's advisers' proposed new portfolio

Marjorie's investment club's suggested portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

I applaud your decision to take greater control of your finances. Don't worry about not being an expert. Common sense tells us that knowledge of the future is scant, and what there is of it should be quickly embedded into share prices. So expertise won't help you make great investments.

A humble acceptance of your limitations, which causes you to diversify well, can make you a better investor than the overconfident expert who piles into bad assets in the mistaken belief that he knows better than the market.

What matters is your portfolio as a whole, which helps determine how much you should invest in equities. As a rough guide, a decent basket of equities has a one-in-six chance of losing you 15 per cent or more over 12 months. So a 50-50 split between cash and shares has a one-in-six chance of losing you around 7.5 per cent or more, and a two-thirds cash/one-third equity split has a one-in-six chance of losing you 5 per cent.

What also matters is how comfortable you are: if you're worried about losing money on your portfolio as a whole, you're holding too many shares.

You should also minimise charges and taxes legally, which means making full use of Isas and why you're right to dump financial advisers who levy unnecessary commissions and charges. Use IFAs for tax advice and financial planning. But you don't need them for help with general investments.

David Liddell, chief executive of IpsoFacto Investor, says:

You need to decide what your investment objectives are. You may be risk-averse, but equity volatility is not the only risk investors face. Interest rate risk - the potential for price volatility in bonds as interest rates rise - is an issue at the moment, and inflation will erode the real value of bonds and cash. You don't have a mortgage and/or need any income from your investments to cover living expenses, but I assume you want to at least maintain the real value of your investments.

To maintain the real value of your investments you will need to increase the allocation to equities. You need to either work out yourself, or with a financial adviser, what your objectives are and then implement an asset allocation to reflect these.

A stocks and shares Isa is worthwhile because from April 2018 only £2,000 of dividend income a year will be tax-free. And if you have a more sizeable allocation to equities than at present, you might incur capital gains tax (CGT) - even taking account of the annual CGT allowance, currently £11,300.

With cash Isas, however, the interest rates can be lower than some of those offered by non-Isa cash accounts. Basic rate tax payers also earn £1,000 of interest on cash a year tax-free. You should also explore all the NS&I cash and bond offerings available.

You are right to question as to whether you are getting a good deal in terms of cost from your stocks and shares Isa, with all the intermediary and underlying fees. However, you also need to consider what other services your financial adviser is providing, and how much time and responsibility you would be prepared to put into managing the investments yourself.

Whether you stay with your current advisers and move to the portfolio of 21 holdings, or manage your own investments, is a matter of personal taste. The portfolio they propose certainly looks like a step in the right direction from an asset allocation perspective, but you should ask your advisers what level of dealing costs this will incur.

You might also find some cheaper financial advisers if you shop around.

James Norrington, specialist writer at Investors Chronicle, says:

Regarding the investment of your stocks and shares Isa, the first thing you need to do is determine what your risk tolerance is and choose an appropriate asset allocation. Your financial advisers have suggested a higher proportion of fixed-income funds, which invest in government and corporate bonds, and in some cases property and preference shares.

By contrast, your investment club has constructed a portfolio entirely invested in shares, which is riskier. As you own your home, and have secure pension income and £500,000 in cash, you have the capacity to take on some additional risk in the Isa portfolio. But if you are seeking to invest a higher proportion of your assets over time, then a balanced asset allocation strategy would be better.

But I think your stocks and shares Isa could have an allocation to equities of more than 47 per cent, as is the case with your advisers' proposed 21-fund portfolio. When you already have £500,000 in cash, it seems pointless having cash equivalents in your stocks and shares Isa. If income and capital protection are more important to you than growth, I would probably go for a basic 60:40 allocation to equities and bonds.

When you have decided on your strategic asset allocation, if you switch more cash into investments a good way to do this is value averaging, as some may have become expensive. This involves increasing the value of your portfolio by a set amount over a given period, for example, every month. If the securities in your portfolio fall in price in any given month, then you will have to invest a greater amount of money to make the value of your portfolio increase by your chosen amount. Conversely, when the prices of your investments rise you put in less money to make your portfolio reach the target value, and consequently spend less on securities when they are most expensive.

However, this approach means you invest in negative momentum - buy more when investments have done badly. To mitigate this, firstly decide on the amount of capital you want to invest in the markets over, say, the next year. If you hit this amount value averaging before the year is out, stop investing and sit tight until the next year.

Or if the securities you are investing in fall below a certain percentage of their 200-day moving average price, suspend your purchases.

Either way, if markets drop, you will have greater peace of mind knowing that you still had more cash in reserve, compared with investing a larger amount upfront.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

The simplest and cheapest way to invest in equities is via a fund which tracks global equities. This should be everyone's default option: you should deviate from it only if you've got good reasons. That said, your investment club's proposed investments look tolerable. The individual stocks are mostly defensive dividend payers and these, on average, outperform over the long run.

The investment trusts offer some international diversification, though not necessarily any better than a simple tracker fund. But if you are going to buy them keep an eye on their discounts to net asset value (NAV). You can find this data on various websites such as www.theaic.co.uk or www.morningstar.co.uk. A big discount relative to a trust's own history can be a sign that sentiment is unusually depressed, meaning it is cheap. Equally, a low discount or high premium can be a sign of excessive exuberance and an over-priced trust.

This principle suggests we should be cautious about some of the trusts in your investment club's propsed portfolio. As it's also the time of year when equities tend to underperform, this perhaps argues for not piling into them now. So too, arguably, is the fact that the cyclically adjusted price-earnings ratio on the S&P 500 is now very high: if US shares fall, they'll drag down most equities.

Granted, not everything is sending a sell signal. The dividend yield on the FTSE All-Share index is around average and this index is above its 10-month moving average, both of which are mildly encouraging signs.

But perhaps this is good news for you. It suggests that while you should take control of your money, there's no great rush to pile into the market. So take your time.

David Liddell says:

You raise the question of whether equity markets are toppy at the moment. The FTSE 100 has certainly had a good run, but investors should not necessarily worry about record highs. In real terms, that is inflation-adjusted, the FTSE 100 is nowhere near its record high of late 1999. If you are want to increase the equity content of your portfolio, but are worried about valuations, the answer is to drip-feed money into the markets, for example, make a regular monthly investment.

I would suggest putting some more money into equities,.but do this gradually and avoid individual equities, concentrating initially on some mainstream collective funds. Options include Edinburgh Investment Trust (EDIN), Temple Bar Investment Trust (TMPL) and Finsbury Growth & Income Trust (FGT). We include these in our £100,000 investment trust portfolio.

James Norrington says:

There are a lot of managed funds in your advisers' suggested portfolio and given that these have higher charges than, say, passive exchange traded funds (ETFs), you need to consider whether the managers are adding value.

A portion of the bond allocation should be in less risky shorter duration sovereign issues, such as close to maturity gilts (UK government bonds). An ETF would be the cheapest way to access this simple risk-diversifying investment.

With the remainder of your bond allocation, to get a higher yield you need to invest in a combination of index-linked, corporate, high-yield and asset-backed bonds. Selecting bonds with different liquidity, interest rate and default risks is a complex process so I would suggest one or two actively managed bond funds. The Henderson Strategic Bond (GB0007502080) and Fidelity Strategic Bond (GB00B469J896) funds you currently hold are good options, and you could save money on exit fees and trading costs by maintaining some of your existing investments.

For your equity allocation, you want exposure to different regions, not just the UK. The investment club portfolio suggests FTSE 100 companies which make their revenues internationally, but you also need to invest in different markets, which is what your club's investment trust choices do. But I'd still try and split the equity investments more evenly between UK shares and funds, and internationally-focused funds.

You could get exposure to most international markets cheaply with ETFs focused on Europe ex-UK, Japan, Asia Pacific ex-Japan and North America. For frontier markets, or particular themes and opportunities you want more exposure to, for example, Asian equity income, you could invest in a managed collective fund.

The FTSE 100 shares suggested by your investment club represent a broad play on the index. And by having equal weights in each of these stocks you will get different performance to the index, which is weighted according to the size of the companies' market capitalisation.

Some of the companies in the investment club's suggested portfolio are trading on very high multiples of the cash flows they are expected to generate in future. So you could instead invest in an active UK large-cap fund, with an investment strategy that suits your income/growth requirements, and let its manager take the decisions on stock selection. In the UK, active funds will periodically underperform the index depending on whether they have a growth or value bias but, over time, some UK managers have a good record of beating their benchmark indices.