Reduce your holdings and have a talk about tax

His wife will take early retirement in six months' time when she will get a pension of £22,000 a year plus a lump sum, but she plans to work part-time for at least one more year. She has her own investments - as she has a fundamentally different risk attitude to Graham they tend to keep their savings separate.

Their home is worth £1m and mortgage-free, and they have provided loans to their children to help them get on to the housing ladder, which they are repaying at £820 a month over the next 23 years.

"My self-invested personal pension (Sipp) and individual savings account (Isa) are longer-term investments, so I am primarily looking for growth," says Graham. "Over the next couple of years I will transfer all my shares into my Isa. I don't need additional income, however this may change in five years' time when I may stop work all together. I would also like to minimise inheritance tax (IHT).

"I have been investing in a small way for more than 30 years, but over the past five years, as my financial situation has improved, I have become far more active. I am always looking for opportunities and can be a little impulsive if I read a convincing investment article.

"I enjoy investing in smaller companies and historically have favoured pharmaceuticals, and companies that provide the picks and shovels for the gold rush, such as Bango (BGO).

"I recently bought shares in Scottish Mortgage Investment Trust (SMT) worth £2,000, and sold shares in Taylor Wimpey (TW.) and Crest Nicholson (CRST) worth £1,300 and £2,300, respectively. I have been good at buying investments, but have only recently become comfortable with selling.

"I am considering using the cash in my Isa to buy MFM Slater Growth(GB00B7T0G907) and Liontrust Special Situations (GB00B57H4F11).

"I am prepared to take risk, but losing more than 30 per cent in a bad year would worry me."

Graham's portfolio

THE BIG PICTURE

James Norrington, specialist writer at Investors Chronicle, says:

If you have no mortgage and plenty of income to meet your needs, and if avoiding inheritance tax (IHT) is a priority, you could reduce the charge on your estate by making the loans to your two children a gift. This would mean the money counted as a potentially exempt transfer for IHT purposes. But you would need to survive seven years past the date of the gift for it to fall outside of your estate.

You and your wife each have a lifetime IHT exemption of £325,000, plus an additional property exemption, which is due to rise to £175,000 by 2020. When one spouse dies their allowances pass to the other, meaning that when you are both dead you could pass on a £1m property to your children free of IHT.

Using future Isa allowances to provide shelter for investments currently outside tax wrappers makes sense.

Tax decisions are complex and the most appropriate course of action for you will change when you are fully retired and fall into a lower income tax bracket. Therefore it is important that you speak to a qualified financial planner.

For example, if your Sipp is written in trust, any benefits that haven't been crystallised could be passed on outside of your estate free of IHT. But this is just an example - the best course of action for you will depend on: how close you are to your pension lifetime allowance, which includes your work pension; what you need to draw from your Sipp in retirement and your overall future tax position.

If both of your financial needs are covered, and you are just looking for ways to shield money from IHT, you could consider putting aside a pot of 'fun money' that you can't protect from the taxman in any vehicle.

You could use it to indulge your passion for investing in small companies and invest in Alternative Investment Market (Aim) listed companies with IHT exemptions. Think of it as gambling with HM Revenue & Custom's money rather than your own. You offset gains with your annual capital gains tax allowance, which is currently £11,300. And if you lose money, it's just what your estate would have paid in tax anyway.

Tim Stubbs, independent investment consultant at TS Investments, says:

Nearly all your risk assets by value are invested in equities. This is too much - you should consider diversifying significantly by asset class. This is especially the case as you might have a change in lifestyle in five years, and require income generation and possibly a more defensive portfolio.

Equities are not cheap: these have been led directionally by the expensive US market, which I judge to be roughly 30 per cent overvalued - the same level as your comfort threshold for losses. You need to decide whether you are happy with an allocation of about 75 per cent to equities with these risks in mind - I would suggest reducing this significantly given your plans and current equity market valuations.

Above all, ensure that your high-risk portfolio does not have the potential to disturb your personal retirement plans in any worst-case scenario - the portfolio should work for you rather than vice versa.

It is sensible that roughly 90 per cent of your portfolio by value is invested in collective funds versus 10 per cent in direct equities.

Steve Wilson, director at Alan Steel Asset Management, says:

You have a combination of direct shares and funds but don't seem to have a real strategy. Academic, writer and investor Joel Greenblatt said that "choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You might live but you're still an idiot".

Your wife is taking early retirement, but if she is in a defined-benefit pension scheme there may be an early retirement penalty. So as she plans to continue working part-time anyway, perhaps it would be better to create a tax-efficient income from your investment portfolio to fund any shortfall in income, and leave the workplace pension untouched until normal retirement when no penalty applies.

You say IHT mitigation is a goal, but you are still receiving money back into your estate following your loans to your children. Consider writing off the loan and classifying it as a gift out of your estate after seven years.

HOW TO IMPROVE THE PORTFOLIO

James Norrington says:

You have a decent mix of UK funds and global exposure, as well as some real estate investments. Your risk expectations are reasonable, although a 30 per cent fall in value during a down period can't be discounted for a portfolio heavily focused on equities. The key is to have the secure income and absence of commitments that would allow you to sit tight during such a spell of turmoil.

You don't have an unmanageably large selection of investments, although you are probably getting close to the limit. Before adding more funds, you should review the portfolio and check whether any potential additions give anything extra in terms of expertise or exposure. If they don't, then maybe top up existing holdings instead.

Also review your portfolio for funds that no longer match your objectives and prune it a bit - especially if you are considering adding new funds.

Tim Stubbs says:

With regard to alternatives, consider funds focused on assets such as property, commodities, infrastructure and private equity, and hedge and absolute return funds. Various active funds, exchange traded funds (ETFs) and investment trusts allow you to diversify internationally for a reasonable price.

The healthcare sector is attractive as a long-term investment. It has been out of favour for the best part of two years, but demographics, reasonable valuations in many instances and a general lack of near-term enthusiasm for the sector are all contrarian positives.

Hold funds with a capital preservation bias alongside other risk assets, such as CF Ruffer Total Return (GB00B80L7V87), Ruffer Investment Company (RICA), Pyrford Global Total Return (IE00BZ0CQJ19), Troy Trojan (GB00B01BP952) or Personal Assets Trust (PNL).

These funds typically make equity-like returns in the long run, but their managers' approaches are focused on not losing money. Consequently, they often perform well at different times to other risk assets, typically having their best relative years during moments of market troubles due to being very cautious at times when many others are not - such as now. Their managers will also typically increase allocations to equities during notable market corrections, ensuring growth exposures are achieved at the right moments.

I would be cautious about adding a lot of money to new equity market investments right now, even though MFM Slater Growth and Liontrust Special Situations are both excellent funds. But you could replace funds with a similar risk profile that are already in your portfolio with these two. Or invest money into them gradually over time and benefit from pound-cost averaging.

Steve Wilson says:

Within your Sipp alone you have 21 funds, but for a portfolio worth £154,000 that's far too many, as overdiversification is likely to lead to sub-standard performance.

The same can be said for your Isa, which has 15 funds plus shares but is only worth £141,000. I'd suggest a maximum of five or six funds in each.

You have seven Invesco Perpetual funds in your Isa, which hold some of the same stocks as each other, and sometimes a house view can be formed with similar research being carried out. I like Invesco Perpetual Global Smaller Companies (GB00BJ04HH03), but alongside it would prefer one global fund that offers exposure to Asia, the US and Europe, rather than several different funds run by the same investment house.

You have three Europe funds focused on large-caps as well as a European equities tracker, which means you have three active managers, but also exposure to every stock in the index. That doesn't seem a good strategy.

Your US exposure is very limited, although you will have some via your biotech and healthcare funds, and Rathbone Global Opportunities(GB00B7FQLN12), which is run by James Thomson, who has done this excellently for many years now.

In the UK space, you hold some good funds, such as Old Mutual UK Smaller Companies (GB00B1XG9599) and Fidelity Special Situations(GB00B88V3X40). But you have too many individual funds and there is crossover, in particular with Schroder Small Cap Discovery(GB00B5ZS9V71).

I'd suggest having one fund in that space as it will typically have 60 holdings plus.

You have too many funds and shares, and seem to have no real sell discipline or way of re-evaluating a holding when it reaches a target price.