How should I simplify my portfolio so I can pass it on?

Casper is age 64, retired and draws about £35,000 a year from his self invested personal pension (Sipp) as an income for himself and his wife. Otherwise they keep their finances separate. He has an adult son from his first marriage who is working and close to being financially independent.

Casper's home is worth about £250,000 and is mortgage-free.

"I aim to leave my individual savings account (Isa) to my wife and Sipp to my son at  similar nominal values to what they are now," says Casper. "Preserving their values in real terms, especially with inflation as it is, would be harder, so is this an unrealistic ambition? I'm not expecting any massive expenditure as I've done all the travel I want to and hope that I won't have to go into a care home in later life.

"I currently draw roughly the natural yield from my portfolio - a bit less than 3 per cent. But when I start to receive the full state pension in just over a year's time I will reduce the amount I withdraw from my Sipp each year by the same amount, so only draw about £25,000 a year. This should fall well within the natural yield as it will be closer to 2 per cent, and help to maintain the nominal value of my Isa and Sipp.

"I have invested since I started working and take a long term approach - I don't try to time the market. The most the value of my investments has ever fallen in any market collapse is about 30 per cent and they have bounced back quite quickly.

"I used to invest directly in UK listed shares and had about 30 holdings. I also had substantial investments in active funds run by firms such as Baillie Gifford and Montanaro Asset Management, and mangers including Terry Smith and Nick Train.

"However, I have recently changed to being entirely invested in passive funds because I want to pass on low maintenance investments to my wife and son.

"I prefer passive open-ended unlisted funds to exchange traded funds (ETFs). And when I do buy ETFs, I prefer ones which buy the assets they track rather than ones which try to replicate the returns with derivative instruments. But I do hold Xtrackers FTSE Vietnam Swap UCITS ETF (XFVT) and L&G All Commodities UCITS ETF (BCOG) which use derivatives.

"I aim to have 65 per cent to 75 per cent of my investments in equities, and half of this in the US. The remainder of the investments are in bonds, alternative assets, gold and cash. The only recent trades I have made have been to rebalance the portfolios. I might add more passive funds and ETFs to the portfolios, but nothing too niche.

"The global equities fund I hold have a bit more Asia Pacific and emerging markets exposure than some others. I think that you have to be careful with Asia Pacific and emerging markets passive funds because they can be skewed to one or two markets and ignore others. Because of this, I also have single country India and Vietnam ETFs.

My favourite funds are Vanguard LifeStrategy 20% Equity (GB00B4620290) because of its bond allocation, Legal & General Multi-Index 3 (GB00B6VR4B04) because of its exposure to alternative assets and Vanguard Global Small-Cap Index (IE00B3X1LS57) which includes some of the companies in the FTSE 250 index.

The (£290,000) Isa's holdings include a global equities tracker which takes an environmental, social and governance approach to investing, to reflect my wife’s preferences.

"Is my choice of holdings and allocations to them about right? As well as investments, I hold cash worth about three years' of my income in my Sipp. But is this portfolio too complex – should I hold any ETFs in it at all?  And is the Isa too simple – should I add more funds to it? Also, are the Sipp and Isa as low maintenance as possible?"

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

Nick Astley, investment manager at Progeny Asset Management, says:

The asset allocation of the portfolio is difficult to pinpoint, given your use of global and multi-asset funds. The managers of these kinds of funds typically move their allocations to regions around, as suited to market conditions.

Your portfolio's structure seems rather mismatched as it appears to be a selection of passive funds bundled together rather than a selection of passive funds with a targeted structure. The UK allocation may be lower than expected because you have chosen Vanguard Global Small-Cap Index for exposure to the FTSE 250 index, but this fund tracks a global smaller companies index.

The Sipp holds a good spread of funds which diversify it by region and asset class. The majority of these funds are plain vanilla products in so far as they are physically backed and track well known benchmarks. However, there is complexity in terms of the structure of the alternatives. Commodities, gold and private equity ETFs can be complex if they get exposure to the assets they track via derivatives such as futures. The risks of these products are different to those of plain vanilla funds so I suggest that you understand these risks before investing in them. But although these areas are more complex, they provide your portfolio with exposure to alternatives helping to diversify it.

Although your Isa may appear to be very concentrated because it is only made up of five funds, two of these are multi-asset funds so invest in many other funds. Legal & General Future World ESG Developed Index (GB00BMFXWM34) and Vanguard Global Small-Cap Index also offer exposure to world equities, including ones listed in North America and Asia. Together with HSBC FTSE 250 Index (GB00BV8VN462), this gives the Isa a global approach across equities and bonds, with a UK equity bias.

You target an equity exposure of around 65 per cent to 75 per cent in the Sipp and Isa, and your last three trades were made to rebalance them. But to have a portfolio which is as low maintenance as possible, it would be preferable to use multi-asset funds because these do this themselves, ensuring that they stay within their investment parameters. For example, Vanguard LifeStrategy 20% Equity ensures that its allocation to equities remains at 20 per cent, so that investors in it do not need to rebalance their portfolios to their targeted allocations. A portfolio which is as low maintenance as possible would comprise a single multi-asset fund.

Alex Brandreth​, chief investment officer at Luna Investment Management, says:

Your portfolio looks good in terms of diversification across asset classes and regions. But I get uncomfortable when a holding represents more than 10 per cent of a portfolio's value, and three investment holdings account for more than this level of your overall portfolio, excluding your home. Vanguard LifeStrategy 20% Equity and Legal & General Multi-Index 3 are well diversified multi-asset funds so less of a concern. But I am slightly concerned about the weighting to a volatile asset class like global smaller companies to which an allocation of nearly 15 per cent seems quite high. Maybe it is time to temper your enthusiasm for Vanguard Global Small-Cap Index.

If you add the allocation to Legal & General Cash (GB00B0CNHB64) to the cash allocations within the Isa and Sipp of £11,046 and £102,896, respectively, it adds up to about 11 per cent of your combined portfolio (excluding the home). With interest rates moving higher in 2022 the returns on this should be increasing. But relative to the current high levels of inflation, in real terms - taking into account inflation - the portfolio is losing ground. I appreciate that you want to hold cash worth three years of your income, but you also have cash bank accounts worth £30,000 and NS&I Premium Bonds worth £30,000. So think about reducing your cash allocation as you are a long term investor and willing to ride through periods of market volatility.

There are some holdings in your Sipp which I would class as being too complex including single country Asia funds iShares MSCI India UCITS ETF (IIND) and Xtrackers FTSE Vietnam Swap UCITS ETF. I appreciate your concerns about passive Asia Pacific and emerging markets funds so perhaps an active fund focused on these areas would be appropriate, as its manager could allocate to different countries, sectors and regions.

I would also class the smaller companies funds - SPDR MSCI USA Small Cap Value Weighted UCITS ETF (USSC) and iShares MSCI EMU Small Cap UCITS ETF (CES1) - as too complex. Your portfolio has a relatively high allocation to this area already and adding country specific smaller companies funds adds to that risk. Active fund managers who invest in small caps are also tapping into an under researched area of the market.

Your Isa is relatively uncomplicated because it has fewer holdings, and perhaps that is deliberate because its value of £289,283 is lower than the Sipp's £943,981 value? I would broaden out the Isa's fund holdings slightly and reduce its allocation to smaller companies which have demonstrated higher levels of risk and volatility compared to their larger company counterparts.

Passive funds provide a low cost way of gaining market exposure. I would not classify some of your holdings - FTSE Vietnam Swap UCITS ETF and iShares MSCI India UCITS ETF - as low-maintenance, though these have a smaller weighting in your portfolio. And only trading to rebalance your portfolio is a very low maintenance way to manage it.

Adding active global smaller companies and Asian funds to your portfolio would increase the amount of portfolio maintenance required.