Can we make good returns without investing in dictatorships?

Chris is age 60 and his wife is 57. He has recently retired and receives a final salary pension of £48,000 a year. His wife will start to receive an occupational pension of about £10,000 a year in three years’ time. She has not yet taken her pension lump sum or additional voluntary contribution.

Chris and his wife have three children. Their home is worth about £1mn and is mortgage free.

"My pension income enables us to live comfortably,” says Chris. “And our investments of about £750,000 and the value of our home should be enough to cover possible care costs in later life and gifts to our children – even adjusting for inflation.

"However, over the next 15 to 20 years we would still like our investments to generate a return of about 5 per cent a year for us to spend on family holidays and charitable donations. We will retain any returns in excess of 5 per cent as a reserve to compensate for years of poor performance.

"I have been investing for five years and, every year, move investments worth the value of our annual individual savings account (Isa) allowances out of our trading accounts into Isas. 

"I would say that I have a medium risk tolerance – I would be prepared for the value of our investments to fall by up to 20 per cent in any given year. 

"I try to maintain our portfolio's allocations to equity related and non-equity investments at the same proportions. I don’t like bonds, especially as I have an index-linked pension. And because of the falling real value of cash I prefer gold, although my wife still prefers cash.

"Infrastructure funds are interesting but seem expensive. And I’m worried that both residential and commercial property are overpriced, although I might use next year’s Isa allowance to invest in a broad global property fund as our portfolio lacks property and infrastructure investments.

"I hold some Bitcoin, mainly because my brother owns a lot of it and it’s easier to share in his happiness – or misery – if I'm partly in the same boat! I also have a small trading account invested in direct share holdings, which I trade for short-term returns, fun and to keep my mind active. I particularly like value stocks which pay high dividends. For example, I bought Shell (SHEL) and sold it when Covid picked up in Europe.

"But I mainly hold investment trusts. If a trust holding falls by more than 10 per cent over the course of a year I review it, and if it doesn’t beat a relevant index after charges each year I sell it. I also review investment trust holdings which have increased more than 20 per cent since I bought them. For example, I recently sold a £5,000 holding in BlackRock Frontiers Investment Trust (BRFI) at a profit and used the proceeds to top up Chrysalis Investments (CHRY). Both these funds are high risk, but I am more comfortable with developed than frontier market risk.

"But  I am not good at selling at the right time. I'm also concerned that we have too many funds so am looking to reduce the number to about 12. 

"I won’t invest in funds focused on China, Russia or other countries where power is held by a few individuals with few checks and balances. 

"I'm overweight UK equities, mainly because of a desire to support British business. For example, I recently invested £25,000 in Temple Bar Investment Trust (TMPL) because I like its holdings and wanted to increase my exposure to FTSE 100 index companies.

"I am not a profit maximiser and feel that investment should also be about important personal objectives. But a relative UK overweight has cost me returns and may again. The US equity market seems very expensive but at least it has a culture of supporting wealth creation.

"Given our goals, do we have the right balance of investments or are there better ways to achieve them? And am I allowing my heart to rule my head too much or can investing help to achieve more than maximum returns?"

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

Chris Dillow, Investors' Chronicle's economist, says:

Economist John Kay has written a book called Obliquity in which he argues that our objectives are often best achieved if we aim at something else. Your portfolio seems to be an example of this.

You say you aren't "a profit maximiser” but some of your decisions taken for other reasons should have helped your returns. Avoiding Chinese and Russian stocks, for example, has been quite a good move in recent years. And the world is inherently unpredictable so you can't maximise risk-adjusted returns – even if that's all you aim for. The 2007-08 financial crisis taught us that.

You should instead maintain a portfolio which you are comfortable with. This isn’t to say that ethical investing always maximises profits. For example, although ethical investors have avoided terrible losses on Russian stocks recently, they’ve also missed out on gains by Shell and arms suppliers.

It’s reasonable not to like bonds. Your index-linked pensions are, in effect, massive holdings of them, so you don’t need any more. And your preference for gold over bonds should have paid off well recently. But this is not because of inflation fears. If it was, gold would have done well when inflation expectations were rising last autumn.

Rather, gold usually does well in times of great global political uncertainty. So if Russia's invasion of Ukraine ends quickly gold is likely to fall back. But as many equities are likely to do well in such a situation, your overall portfolio would do nicely. Gold is a nice diversifier but this works both ways – its price falls in good times.

You say that you aren't good at selling, but no one consistently gets out at the top because no one can tell when the market will turn. So don't beat yourself up – some losses are inevitable. What matters is that you avoid the worst mistakes. These are holding onto losing stocks too long in the hope of breaking even or because you are reluctant to admit that you were wrong to buy them. Losing stocks can fall a long way, not least because of momentum – some traders sell just because others do.

It is important is to have some kind of 'stop-loss rule' (a price at which you sell investments) but I’m not a big fan of yours. If an index starts to fall it can gather momentum and drag down even good stocks within it and good funds which include some of its constituents. For example, in the tech crash of 2000-02 even Amazon.com (US:AMZN) fell 90 per cent. I’d rather focus on absolute than relative performance when considering what to sell.

Holding Bitcoin because your brother does is not an unusual reason. Economists such as Ben Jacobsen, Hans Hvide and Robert Frank have shown that many of us are influenced by friends and family, and not always for the best. But what distinguishes you is that you are aware of this influence.

You also seem to be aware of the risks of value stocks. But remember that there are two different types. Some companies, such as miners and house builders, pay high dividends to compensate for high risks like exposure to recession or because the company is in distress. But telecoms, utilities and tobacco stocks pay high dividends because investors think they’ve gone ex-growth. These are often relatively defensive and are better bets.

With regard to the rest of your portfolio, a well diversified basket of investment trusts is perfectly sensible.

Rachel Winter, associate investment director at Killik & Co, says

Over the long term the equity market has returned 5 per cent a year above inflation. Adding non-equity assets such as gold and cash should reduce a portfolio's level of volatility, but this is also likely to reduce its level of return. So if you withdraw 5 per cent a year from the portfolio, it is unlikely that the remaining capital sum will keep pace with inflation, particularly with the recent higher inflation levels. That said, it is usual to spend more in the earlier years of retirement and you may intend to run down your portfolio to a certain extent.

It's great that you and your wife are taking advantage of your full Isa allowances each year. It’s amazing how quickly this tax-free element of your portfolio can build up when you collectively move £40,000 into it each year.

Infrastructure investment trusts are not as expensive as they have been and the premia to net asset value (NAV) on which they trade can be a little misleading. The assets held by these trusts are illiquid and may only be valued once a year, but the price of their shares changes constantly during market hours. The published premium compares the current share price to the last valuation of the assets, so if the asset valuation is a year old the premium is likely to be smaller than it looks.

But rather than investing directly in an infrastructure trust, you could buy a fund that invests in the sorts of equities that should benefit from a global rise in infrastructure spending. FTF ClearBridge Global Infrastructure Income (GB00BZ01WV25) is a good example. Also consider digital infrastructure trusts such as Cordiant Digital Infrastructure (CORD). These are relatively new to the market and trade on generally lower premiums to NAV than traditional infrastructure asset trusts, but their income yields and prospects for growth are still attractive.

More and more of our clients question the wider impact of their portfolios and you make a good point when you say that profit is not necessarily the only motivation for investing. A portfolio should help its owner to live their life how they want, and that doesn’t always mean maximising profit. Maximising profit involves a relatively high amount of risk which isn’t right for everyone.

Investors can also use their voting power to encourage companies to do the right thing. If you own a company's shares directly, you can take part in its votes. And you can select funds run by managers with a track record of voting in accordance with your own values.

Demand or lack of it by investors can strongly influence how companies operate. In recent years, the desire to invest in green energy has forced many fossil fuel companies to transition towards renewables more quickly. And investors’ preferences for ethical businesses has encouraged companies to act in a more responsible way.

Avoiding investments in undemocratic countries is very topical. This is likely to become a key consideration, given how many investors have been burned by recent falls in the Chinese and Russian markets.