'My father's mistakes made me cautious – but now my portfolio doesn't beat inflation'

Some investing lessons are learned at a high price. After a difficult family experience, George, 68, invested his retirement savings with caution, but is now struggling to make sure his pot grows ahead of inflation, and needs some help.

“My father lost nearly all of his savings when the dotcom bubble burst, not believing tech stocks had reached unsustainable valuations, and holding them all the way down,” he explains. “He had an unrealistic view of his ability to handle risk and, as a result, I’m more risk averse and attached to diversification.”

George and his wife Edna, 62, have a portfolio worth about £570,000 spread across different pension and individual savings accounts (Isas). They also hold £605,000 in cash, £140,000 of which will soon go towards home renovations, and own their home mortgage-free. They need £50,000 a year to get by and want to give about £100,000 to their adult children to help them get onto the housing ladder.

George plans to defer his UK and US state pensions for two years. In the UK, deferral means the annual amount rises by 5.8 per cent for every year deferred. At 70, George should start receiving about £15,000 a year from his UK and US pensions. Edna’s pensions should amount to a similar figure once she retires. The rest, around £20,000, will need to come from their investments, meaning their investment portfolio needs to grow by 3.5 per cent a year after inflation.

He describes their attitude to risk as medium to low. “We have a policy of never selling anything at a loss,” he says. “Last year was the first time it was seriously tested. At one point, we were down 13 per cent, but it wasn’t hard to cope with, thanks to our large cash savings and belief that our worst losers would recover eventually.”

George is tax resident in the UK but still has to file US taxes, which restricts his investment options. “The US taxes funds punitively, and treats Isas as just another investment account, so my investments are solely in a Sipp. We focus our fund investments in Edna’s pension and Isas and our bank accounts in my name,” he explains. He wonders if there are other tax-efficient ways for him to invest in funds.

The portfolio currently allocates about 32 per cent to multi-asset funds, 18 per cent to infrastructure, 26 per cent to fixed income and 24 per cent to shares and private equity. George is planning to add to stock market funds and reduce his holding in BH Macro (BHMG) when it breaks even. “Purchasing it back in 2021 was a good decision, but allowing it to become my biggest holding was a bad decision,” George says. The fund’s share price held up in 2022 but dropped last year, partly off the back of the merger between its two largest shareholders, Investec and Rathbones.

In 2023, George swapped long-term holding in Unilever (ULVR) for Diageo (DGE). “This proved a surprisingly poor decision in the short term,” he says. “I’m happy to hold on to Diageo, but I may not increase it until their future growth and profitability get more clear. I may sell when it breaks even.”

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

Edward Allen, private client investment director at Tyndall Investment Management, says:

Your strategy is very cautious, particularly when taking into account your cash holdings. Once you have decided how much and when to give money to your children, investing some of the cash in stocks or income-generating assets would be sensible.

The purist in me would say that waiting for an asset to break even does not make sense; either it is worthwhile and sensibly weighted in the portfolio or it is not, and if it is too large it should be cut. But there are many ways to bake a cake, and avoiding selling at a loss can be a helpful discipline.

I would bite the bullet and halve the BH Macro holding. Nine per cent is too large a position for an investment trust in a cautious portfolio, where we have both the volatility of the net asset value (NAV) – albeit relatively low in this case – and the discount. I have had a similar journey in BH Macro; I made good money and sold the asset at a premium in 2022, but bought it back in 2023 and have suffered the fall to a 10 per cent discount. This discount level is probably fair given the concentration risk in its largest holder (Investec/Rathbones). I continue to hold the position at a c3 per cent size in my portfolios.

I have also started to buy Diageo. The drinks conglomerate has de-rated to a sensible price/earnings (PE) ratio and now produces a good earnings yield. You might have concerns over changing post-pandemic drinks spending in the US, or tequila de-stocking in Latin America, but over its long history Diageo has surmounted many such challenges and as such merits 'long-term hold' status in the portfolio.

At 4.8 per cent, Schroder British Opportunities (SGO) is a large position in a cautious portfolio for what is a relatively new trust. I would consider halving it and reinvesting in HgCapital Trust (HGT) or CG Enterprise Trust (ICGT), both long-standing private equity trusts, also trading at discounts to NAV. In the interests of simplifying the portfolio, you could increase your allocation to global equity funds such as Guardcap Global Equity (IE00BVSS1C10), or even use a global index tracker.

Infrastructure will have been painful last year. I’m happy with your allocation to that area, which provides a good income and some inflation protection. But again the 10 per cent exposure to Sequoia Economic Infrastructure is too large and should be at least halved. 

The same applies to M&G Credit Income Investment Trust (MGCI). For bonds in a cautious portfolio, I prefer open-ended funds such as M&G UK Inflation Linked Corporate Bond (GB00B460GC50) and Twentyfour Dynamic Bond (GB00B5VRV677).

You might want to consider an allocation to emerging markets, where the JPMorgan Emerging Markets Investment Trust (JMG) is my go-to option, or its sister fund JPMorgan Global Emerging Markets Income Trust (JEMI), which has an income focus. Japan is also notable in its absence.

Giles Marriage, head of portfolio management at Atomos Investments, says:

You have clearly saved diligently over a long period, have no debts and your investments are fairly diverse and primarily consist of funds, which is all positive. The large amount held in cash and inflation risk is a concern over the medium to longer term. You only need six to 12 months of income as emergency cash deposits (excluding your home renovation pot and what you want to give away). Stocks may be volatile in the short term, but on average have provided annualised returns of 5 per cent ahead of inflation.

Cash savings have enjoyed their best rates of return for some 15 years, but with interest rates expected to fall in 2024-25, it would make sense to have more in bonds, ideally before we start to see interest rates cut. Bonds had a torrid 2022, but have typically provided better annualised real returns than cash, with less volatility than stocks. With falling interest rates, bonds can provide some capital appreciation, as well as an element of recession protection.

For a ‘medium-to-low’ risk investor, we would recommend 20 per cent in government bonds, 33 per cent in corporate bonds and 9 per cent in high-yield bonds, via both passive and active funds. For example, look at iShares $ Tips ETF (ITPS) for inflation protection and at iShares $ Treasury Bond 20+yr ETF (IDTL) for long duration assets [which are more sensitive to changes in interest rate expectations]

You should revisit your strategy of never selling anything at a loss. Markets move quickly and things can change, so sometimes it is best to cut your losses and run. Also review the underlying costs of your investment trusts, as the total expense ratio (TER) for some of them is very high and cheaper options are available.

You have more than enough assets to generate the £20,000 annual income you need without eating into your capital. But inheritance tax is likely to be an issue on the second death given asset growth over time, so making gifts to your adult children may be opportune. As long as you survive for seven years after making the gift, the money will not be subject to inheritance tax.