'I've lost confidence in my investing skill – what should I do?'

John is 80 and has an income before tax of about £44,000 a year. He receives £32,000 from a former workplace pension, a UK state pension of £9,720 and US social security benefit of about £2,250 a year. His wife receives a UK state pension of about £7,000 a year and is a non-taxpayer.

They jointly own their home, which is worth around £480,000 and mortgage-free. John and his wife have a credit card with debt of about £1,300, on average, but they pay it off each month.

“We would like to buy a new electric car in six years,” says John. “This will be partly funded by our cash savings but also by taking about £15,000 from my investments. Our cash savings also include about £114,000 in individual savings accounts (Isas), which mature in just over a year and from which we will draw if we need to cover the costs of care. So I want to leave my investments, other than what we use to buy a new car, to grow untouched, and to pass them onto my wife (if I die before her) and then to our four children, equally divided between them.

“I see myself as an investing risk taker, and I started investing in January 2020 but panicked in early 2022 due to high inflation and the invasion of Ukraine. I regrettably sold all of my investments, which were mainly growth-orientated investment trusts and a few direct shareholdings, and swore to never invest in the stock market again. I made a profit of about £200 on their sale. But soon after, I put some of the sale proceeds into NS&I Premium Bonds and the rest of the money back into investments. With this costly experience under my belt, I now view selling as an admission of defeat, put my faith in the market coming back and don’t sell anything.

"I do research using various sources, including Investors' Chronicle, and choose investments on the basis of the data I collect and my gut feeling. Recent examples of portfolio additions include iShares UK Dividend UCITS ETF (IUKD), hVIVO (HVO) and Abcam (US:ABCM). And I am thinking of investing in Metal Tiger [now known as Strata Investment (AU:SRT) and BATM Advanced Communications (BVC). However, I have lost confidence in my ability to make decisions so am dithering about whether to invest in these."

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

James Norrington, associate editor at Investors' Chronicle, says:

It seems that your style of investing has a hobby element. While this in itself is not a bad thing, it means your holdings look more like a collection of shares that have piqued your interest than a strategic portfolio. You are taking quite a lot of risk in the general investment account (see chart below) while, conversely, there is room for perhaps a bit more calculated risk in the Isas, while acknowledging that they are an important insurance for possible costs of later life care.

The first rule of investing is not to overshoot your capacity and tolerance for risk. So it's good that the general investment account in which you have the risky investments is only a relatively modest portion of your wealth.

As you have a specific purchase in mind and it’s possible that electric vehicles may become cheaper as more are produced, I’ll consider nominal rather than real returns for your portfolio. If you're trying to make an extra £15,000 in six years within the general investment account, it will need to achieve a compound annual growth rate of about 6.7 per cent – or less if you can afford to keep topping up your portfolio with spare income.

So you could come close to achieving most of your goal for this pot of capital with a global equities tracker fund, the dividends from which you reinvest. This has the advantage of low fees, and balances risk across geographies and sectors in line with the size of the global equity universe. Diversification is often touted as the only ‘free lunch’ for investors.

Since 2000, a period that has included the deep equity bear market of 2000-03, the global financial crisis, the market’s initial Covid shock and last year’s sell-off due to rising interest rates, the MSCI World index's annualised nominal rate of total return in sterling was 6.6 per cent. You could have a bad six years and undershoot, but individual shareholdings also incur that risk. And investing passively is a way to eliminate your anxiety over which stocks to buy and the loss aversion you exhibit. Hanging onto losers because you hope that they’ll come good is a bad habit and investing via a tracker fund allows you to defer such difficult decisions to the market.

This isn’t meant to put you off investing in individual shares, which can be tremendously rewarding. Apart from the money, this is a great way to keep on top of world affairs and what’s going on in the economy. However, when investing on the basis of bottom-up research – focusing on individual companies rather than an overarching strategy – you can have some great winners but also losers. And if you have a few big losses that place your portfolio's goal in jeopardy, you might be put off investing. This would be a shame because you could be making those Isa savings work harder for you.

Your Isa savings are earmarked for an even more important objective of funding possible care costs. A sensible asset allocation of, say, one-third cash, one-third government and investment-grade bonds and one-third in a global equities tracker fund would provide a decent balance between cash liquidity and steady capital growth. Although you should be able to get a better rate on cash when the Isas mature, by then valuations of bonds and shares may also be in your favour. So wait until the cash Isas mature and then consider carefully.

In the meantime, keeping some money aside for stockpicking is challenging and exciting. If you’re learning how to do this, keep a watchlist of companies across a few sectors and really take time to understand their macro drivers, business models, operational issues and financial fundamentals. Combining this with a sense of fair valuation and price targets can be a fabulous way to make money but it’s not always a smooth ride. So for important family financial goals, in this case I would go for the simple option.

You can add companies to your watchlist, set alerts and monitor their progress on the IC website here.

Rikki Doré, senior private client manager at Courtiers, says:

Firstly, establish your outgoings and compare them with your joint income to see if you can use any surplus income to help meet your objectives.

Your shorter-term objective of purchasing an electric car in six years’ time with £15,000 of your invested assets and cash savings is achievable. However, rather than mainly funding the purchase from your investments, we would first see whether it’s possible to make the purchase entirely out of your cash holdings. And if you can afford the car now, why not buy it now?

Your longer-term objective is for your investments to form part of your estate on your demise, pass to your wife and, when she dies, pass to your children. From the information you have given us there doesn’t seem to be an immediate inheritance tax liability, although to provide a more definitive answer we would need to look at your situation in more detail.

Having gathered all the information necessary to suggest ways to meet your objectives, we would establish what size of emergency cash fund is appropriate for you. You say that you’re a risk taker, so having a contingency fund would allow you to continue to take the level of risk with your investments with which you are comfortable. [This is because you wouldn’t need to draw from your investments to cover costs in emergencies so] wouldn’t have to be concerned about a drop in their value in the short to medium term.

So are you comfortable holding cash worth £114,000 in fixed-term Isas? This capital is effectively tied up until the end of its term as it doesn’t allow instant access without penalties. I would review the cash Isas when they mature and look to move this money into stocks and shares Isas invested for growth in line with your attitude to risk. You could also take an income from stocks and shares Isas.

A flexible Isa would be best as these allow you to replenish any money you withdraw from them without reducing your tax-free allowance, as long as you do it in the same tax year as the withdrawal. Using a flexible Isa in this way could be a way to finance the purchase of a car.  

Another benefit is that when you die, an Isa can be passed to your spouse as an additional permitted subscription. This would allow your wife to benefit from the tax-efficient growth of your Isa in the future as well as her own. The proceeds of your Isa could be transferred or paid into an Isa of her choice.