Reduce your holdings and seek tactical opportunities

They have three children, two of which are financially independent. Their third child is finishing her undergraduate degree in fashion this month but expects to continue studying so will receive some financial support from Steve and Sue.

"If we can produce 3 per cent to 4 per cent a year from the investments in our individual savings accounts (Isas), with our current income this should be sufficient for everything we are planning over the next five years, such as holidays and new cars," says Steve. "We have enough ready cash to cover any emergency.

"We have cash Isas worth £30,000, which are in five-year fixed-rate accounts. And we will put a further £20,000 into a Santander 123 account that pays 1.5 per cent a year.

"I am also about to inherit a portfolio of equities valued at £79,000 and a lump sum of £170,000. We will be integrating the equities into our Hargreaves Lansdown Isa portfolios over the next two years. We also have cash worth £26,000 in these portfolios waiting to be invested.

"Our home is mortgage-free and worth about £835,000. We also have two buy-to-let properties worth at least £360,000, on which the combined mortgages are £193,500. These produce £18,600 a year before tax and expenses. One of our buy-to-let mortgages is due for renewal as the fixed rate ends in November, so we are planning to pay down the outstanding amount of £93,000.

"Although we have been investing for over 30 years we are uncertain as to whether we have a balanced portfolio, and whether we need to increase or reduce our number of holdings.

"If we do need to increase them, should we look in different areas?

"We thought of buying: Murray International Trust (MYI) to get exposure to Asia & emerging Markets, City of London Investment Trust (CTY) because it has a good record of increasing its dividend, LXI REIT (LXI) to hedge against inflation with exposure to property, and BlackRock Frontiers Investment Trust (BRFI) to add an esoteric fund to the mix.

"We are also thinking of increasing our holding in Scottish Mortgage Investment Trust (SMT) because of its exposure to the US.

"Or would tracker funds be a good addition?

Steve and Sue's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

This portfolio is overdiversified - you've spread your money thinly over many assets. This gives you tracker fund-like performance balanced by safe assets - but with unnecessary fees. You are handing too much of your wealth to asset managers without getting anything back in overall performance.

To rectify this, go back to first principles. The first thing to consider when building a portfolio is what the balance should be between risky assets such as equities, and safe ones such as cash and bonds.

You'd like a total return of 3 per cent to 4 per cent. On the reasonable assumption that equities will give an average total real return of 5 per cent a year, this points to an equity weighting of 60 to 80 per cent. The latter gives you a roughly one-in-six chance of losing 8 per cent or more of your wealth in a 12-month period. If that discomforts you, hold fewer equities.

Then consider how much of your safe assets will be in cash and how much in bonds. The latter would do well in some circumstances in which equities would fall, but this comes at the price of doing badly in normal times - and worse if the world economy grows more strongly than expected. Think of corporate bonds as a mix of equities and government bonds.

Also think about how best to maximise cash returns. For example, is your BlackRock Cash fund really a better investment than some savings bonds?

Richard Stammers, investment strategist at European Wealth, says:

Looking at your financial circumstances, earnings, assets and liabilities, plans for the future, and requirements from your investments, your goals seem achievable.

You should be able to move the investments that are not in Isas into these wrappers in a short period of time using forthcoming Isa allowances. Also look at what pension contributions you might be able to make.

Reducing your debt and holding sufficient cash for emergencies is very important. And ensure that you have wills and Lasting Powers of Attorney in place.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

For the equity portion of your portfolio the default option is a global tracker fund - think of this as a low-cost fund of all equity funds. You can then think about what to add to this - there are several options, many of which you already have exposure to.

Emerging market equities offer high returns in normal times, but with the risk they'll do worse than most equities if markets generally fall. They also incur cyclical risk as they tend to underperform in global economic slowdowns. So your interest in frontier market funds is reasonable. These offer the chance of decent growth and are not as highly correlated with global equities as most markets, so offer some genuine diversification opportunities.

Defensive stocks offer a decent chance of moderate long-term outperformance. This argues for sticking with some of your individual holdings such as Unilever (ULVR), National Grid (NG.) and Vodafone (VOD). You also have exposure to these via some of your equity income funds, including Old Mutual Woodford Equity Income. These are some of the very few actively managed funds I would consider holding.

It's reasonable for you to hold lots of overseas equities and even overseas bonds, as they diversify some of the risk of your buy-to-let investments. A fall in UK house prices, or an economic downturn that reduces rental income, would probably be accompanied by a fall in sterling. But that would increase the sterling value of foreign currency holdings, so overseas assets would hold up if your buy-to-let holdings do badly.

When considering whether to put money into an investment, don't try to assess whether it is attractive. Instead, consider whether it gives you something that you don't already have, such as higher returns or spreading of risk.

But if you have a global tracker fund, cash, bonds and a few other equity investments, such as defensives or cyclicals like emerging markets, a new investment is likely to offer little more than you already have. You could therefore save money by dumping a lot of your higher charging funds.

Richard Stammers says:

A balanced portfolio can mean different things. In the context of a portfolio that balances return with a moderate level of risk, then you have one that combines a variety of higher and lower-risk assets. But your investment portfolio has a bias to equities, which are higher risk, so we would regard it as being between balanced and growth. Because you have a larger proportion in developed markets and larger companies your equity allocation has a more defensive stance.

Your equity allocation also has a good international spread of investments, which provide access to global opportunities and diversification. The emphasis on the UK equity market should allow you to benefit from this country's relatively strong economy, and the equity positions have a notable cyclical bias, which we regard as appropriate at this time.

Cash is low risk, but will provide little, if any, real return. Your fixed-income investments are in a variety of funds, but we would prefer to see a bias to shorter duration and higher quality bonds, given current bond prices and the expectation that interest rates are more likely to rise than fall.

You do not need to increase your number of holdings as your existing investments are sufficient to meet your needs. You should rather reduce the number and consolidate them into a more focused list. Some of the very small positions offer little scope to add meaningful return and should be sold altogether.

But do consider investments in different areas, such as some longer-term themes including global infrastructure, technology and the fast-growing economies of frontier markets.

Frontier markets offer access to economies that have some of the most attractive demographics and growth. But they also have higher-risk characteristics such as lower regulation, currency risk and liquidity issues, so only add a position of sufficient size to provide a meaningful opportunity, but not so large as to skew the portfolio's risk profile.

If you are keen to maintain a more balanced portfolio, increase the allocation to lower-risk assets. For an inflation hedge and safe-haven diversification, we would consider an exposure to precious metals. But we would avoid property as it has fixed-income characteristics, and equities are a much more attractive inflation hedge. You also already have significant exposure to residential property.

We don't think tracker funds would be a good addition just now - although they have lower costs, there are times when an experienced active manager can add value.

Murray International is an excellent trust, and Asia and emerging markets should continue to have a key role in your portfolio as we expect these to deliver higher growth over the longer term.

City of London is another great trust and growing dividends are always welcome.

Scottish Mortgage Investment Trust, a favourite of ours, has an excellent reputation and increasing your US exposure would be a good idea.

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

You have quite a reasonable level of diversification across asset classes, but your cash allocation is high, which will have been a drag on your overall performance over the past two years. However, a good cash allocation is now quite prudent given the all-time highs we have seen across global equity markets.

You don't have a cohesive strategy, given that you have a large number of direct equity holdings which require a lot of ongoing research. And having a high number of funds means you could be at risk of stock overlap. So we would not regard this strategy as balanced.

We would suggest restructuring your portfolios, having a much more focused approach to asset allocation and actively managing them to take account of the changing economic backdrop.

You have too many holdings, with many positions representing a very small percentage of the portfolio. We would suggest having not less than 3 per cent in any individual position, and not more than 7 per cent. This could also help to manage risk.

Reduce the number of holdings to between 20 and 25, ensuring that you are invested in the highest-quality funds and managers.

Any portfolio should be well diversified if it includes fixed interest, global equities, property, alternatives, absolute return and cash. There are also tactical opportunities that could be investigated such as infrastructure, technology, healthcare and commodities, which have delivered very good returns over the long term.

Passive tracker funds would keep costs down, so you could use them at appropriate times.

Also consider investment trusts when they are priced at deep discounts to their net asset value.

We think the funds on your current buy list are all right, but you may also want to consider some of the following for diversification:

Lindsell Train UK Equity (GB00BJFLM156)

Polar Capital UK Value Opportunities (IE00BD81XX91)

Henderson Global Technology (GB0007716078)

Fundsmith Equity (GB00B41YBW71)

Trojan Global Income (GB00BD82KP33)

Evenlode Income (GB00B40SMR25)

Premier Global Infrastructure Income (GB00BTHH0732)

BlackRock Asia Special Situations (GB00BJGZZ065)

Baring Global Resources (IE00B4V6GM81)

Guinness Global Energy (IE00B6XV0016)