'I started investing 50 years ago – how do I simplify my portfolio?'

Being retired with a steady and sufficient income is the dream for many. All debts paid off, a legacy to leave for the family, and time to do your hobbies. That dream is Jeremy’s reality.

The 78-year-old retired some time ago and lives with his wife, Paula, 76, in their mortgage-free bungalow. Receiving disability benefits, the state and workplace pensions mean that the couple’s income needs are covered, leaving their investments to grow untouched. Jeremy has yet to even activate his 25 per cent tax-free pensions lump sum and says he’s unlikely to touch his investments at all.

The couple have amassed solid wealth and have an investment portfolio worth around £980,000, spread across personal pensions and Isas. There is also a general investment account with some direct shareholdings. The couple also has a collection of cars and cash accounts from a house sale worth £164,000.

Jeremy wants to review his financial situation and check his portfolio, which, across the multiple accounts, has an eclectic mix of funds, investment trusts and shares (see table below).

His first investment came in the 1970s. “I used to read The Sunday Times and studied the business pages, and was tempted to buy £100 of shares in Town and City Properties after a tip in the paper. The property crash meant they were then owned by Barclays Bank and Prudential, eventually taken over by Sterling Guarantee Trust, then reversed into P&O. P&O then split off Princess Cruises and then both were taken over by Carnival Corporation (CCL). The final result is the 64 shares I own today.

“As a result of Thatcher's privatisations I invested in all the issues I could. These formed the backbone of my Isa. In the early 1990s, I started a pension with Hargreaves Lansdown and invested the maximum I could each year. I also opened an individual savings account (Isa) and have another with Interactive Investor. 

“I have always attempted a balanced portfolio, but have never had any investment advice and, apart from sporadic personal reviews, I picked or sold and chose new investments each year,” he says.

This explains Jeremy’s portfolio: legacy shareholdings that have done well over time, UK funds, some of which are past their heyday, and investments in the promise of China and emerging markets.

The portfolio is convoluted and there are 55 separate investments, some of which are duplicated across the four accounts. In total, there are 74 holdings. There is also some £180,000 in cash, as Jeremy was worried about changes to the pension lump sum rules and kept it ready to withdraw at short notice. He now wants to reinvest this.

Jeremy says: “I would like to rationalise all our investments to make it simpler for my wife and son to administer, assuming I die before her. Apart from retaining the Carnival shares for the shareholder benefit, all other investments are disposable. Any shares that are currently showing a loss could be retained if their future prospects are likely to improve.”

He wants a better balance between growth and income, may add exchange-traded funds (ETFs) and is considering adding Royal London Short Term Money Market (GB00B3P2RZ52), iShares UK Gilts All Stock Index (GB00BPFJDF23) and buying shares in Legal & General (LGEN).

“Although we basically live on our pensions, I would like to retain easy-access cash for emergencies. I am also considering transferring from Hargreaves Lansdown to Interactive Investor to save on fees.”

Given Jeremy’s assets, he is also conscious of inheritance tax and wonders whether trusts for his son, 38, and two grandchildren, eight and six, are suitable. He also wants to know what to do with his cash – which totals £345,000 when combining the cash accounts and the investment accounts –  and is considering buying Premium Bonds and using NS&I accounts. Health permitting, the couple plan on living in their bungalow until death and will leave a sizable charitable donation.

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

Ben Yearsley, investment director at Shore Financial Planning, says:

This is a typical portfolio – I don’t mean that to sound negative, but it is something I often see. A few large holdings dominate proceedings and lots of small positions. In your case, there are 32 holdings that are less than 1 per cent. The reality is unless these holdings are a 100-bagger, then they really aren’t adding to the portfolio or giving you any diversification. 

So, this isn't a particularly balanced portfolio as it is quite growth-focused. The top two positions as well as the fourth largest invest in similar styles and account for almost 26 per cent of the portfolio. Looking down the list of his holdings, some are decent, but there are a few exceptions, such as Jupiter UK Mid Cap. But the main issue is the wildly differing weights. There are not enough drivers of performance.

There are no issues with having direct holdings, however, how closely are you monitoring the newsflow for example? Also, and probably more importantly, there is little point in having a £1,000 holding in a £1mn portfolio. If these holdings are serious investments, then they should be bigger in size. If you hold them as ‘play money’ then they really should be in riskier and more value stocks than United Utilities, Lloyds Banking Group and Saga.

Ignoring the direct shares, I would aim for about 20 funds or trusts overall. That’s all you need for good diversification. A mix of growth, value and defensive holdings, with a few esoteric ones that don’t fit the mould. I would simplify massively and question every holding worth less than 2.5 per cent. Ask the hard questions – why are they there? For any you want to keep, increase the weight up to 2.5 per cent as a minimum. 

You should also reduce the dominance of quality growth by reducing the Lindsell Train and Fundsmith Equity weights – maybe take LT down to 10 per cent and Fundsmith to 5 per cent. That frees up cash for new holdings. I would look to add some defensive growth at a 5 per cent weight – infrastructure as it has long-term inflation-linked qualities too – and my pick is First Sentier Responsible Listed Infrastructure. I've also added a few other new funds below – such as Polar Global Insurance, which is a unique fund.

I would also buy direct gilts and not a gilt fund – there is no point in paying a manager when you can get certainty of returns by buying direct. You should put some of the cash into gilts and buy under par, to get a largely tax-free return.

In terms of moving to Interactive, I would say that fees should not be the only consideration. Functionality is as important. But if you are concerned about fees, phone up Hargreaves and ask for a discount – you have a decent amount with the firm. You could play the game a bit and, for example, have only shares and trusts in your Hargreaves Isas and have your annual fees capped at £50. Finally, it would make sense to add Premium Bonds.

Dennis Hall, chartered financial planner at Yellowtail Financial Planning, says:

Balance can refer to more than one thing, including asset allocation, geographical spread and investment selection. The allocation between shares (growth assets) and cash (defensive assets) is probably a bit more ‘defensive’ than it needs to be given you don’t need it for income. Geographically, there is too much home bias and you should allocate around the same weight as the global stocks index.

There is a high concentration in a small number of funds via Lindsell Train Global Equity and Fundsmith Equity. You need a clearer overarching investment philosophy, because one day someone else may need to take over the running of your portfolio, and so simplifying your portfolio is a smart move.

That being said, there is a need to radically alter your asset allocation. I would be tempted to reduce the cash, perhaps by making gifts rather than adding stocks. It is also difficult to find high rates of interest so short-dated bonds might be appropriate. Redemption yields for bonds maturing within the next one to two years are around 5 per cent. The high level of cash in the pension is money that is going backwards. It’s hard to imagine a government making an overnight end to the current tax-free cash position from pensions, and there are easier ways of increasing the tax take, such as stopping tax-free distributions on death below age 75. So I think you can worry less about this and put the cash to work.

In terms of inheritance tax, trusts are increasingly unattractive due to their complexity, especially their administration and taxation after changes were made by HM Revenue & Customs. Moreover, younger generations are more likely to need help to get onto the property ladder, so outright gifts are invariably a better option. It would be a worthwhile exercise to run some cash flow models to include the costs of long-term care to see how much could be given away now. If there was a real concern that the 25 per cent tax-free cash would be lost from pensions, then the source of funds could be the cash currently sitting within the pension.

This leads directly to the overall inheritance tax position, and I have always maintained the view that subject to one’s own needs, being covered (and by a wide margin) the most effective planning is to give surplus assets away while you’re alive. The added benefit is that you are around to enjoy the results of any gifts made, but you also get to say how you’d like to see the money used – for example as a house deposit, or for education.

In terms of the cash accounts, NS&I recently pulled a very attractive interest rate from one of their bonds due to its popularity, and at the time of writing, there are better interest rates available from other banks and/or building societies including Coventry Building Society paying 5.2 per cent.

Regarding your pension and Isa provider, at this level of savings, Interactive Investor appears to be cheaper than Hargreaves Lansdown, and occasionally there are ‘cashback’ offers to sweeten the deal. If you are a very low-volume trader then Interactive charges are very low as they are flat fee-based rather than a percentage of assets. The downside is that moving assets in specie is a slow process and there may be several weeks with limited visibility of all the assets.