Cut your holdings

"I inherited cash, investments and the home where I live, which is mortgage-free," says Derek. "But it does require work that would cost around £30,000 before it could be sold at a decent price.

"I never had enough money to invest until recently. But to ensure that I have sufficient pension payments when I retire I have been paying the maximum into a stakeholder pension since 2001. I am thinking of retiring early at 55, or at least taking a couple of months off every so often to go travelling while I am still relatively young at heart.

"I save around £1,000 per month and put half of this into investments and pensions, and the remainder in cash. I keep enough back to live on, although have a very modest lifestyle. I am unsure about the best way to use up my tax-free allowances – should I transfer in investments or cash first?

"I hope to make a return of around 5 per cent a year on average, but don't have an investment plan as I don't think I would stick to it. But I do clear out small holdings and investments that are not doing well, and invest in companies and funds I hope will do well.

"I believe a buy-and-hold approach is a good way to reduce the costs of trading, and I continue to hold when a share price drops in the hope that it will turn around. I haven't sold during market crashes, although have kicked myself for not investing in companies that do well afterwards.

"I have an average attitude to risk, although try to invest in guaranteed returns rather than speculative investments. If a business is doing well then my investment should be secure and it may make money.

"I have recently tried to invest in well-run small businesses, and also initial public offerings (IPOs), possible takeover targets and investments that look as though they could deliver stable returns. 

"But I can see that my portfolio is far too thinly spread and wide ranging, so needs a little pruning. However, with Brexit and various elections coming up around the world, I am unsure as to whether I should diversify my portfolio internationally or stick to UK businesses that are well run.  

"Recent trades include buying Sky (SKY) in the hope that a takeover offer will be made for it, and AEW UK Long Lease REIT (AEWL) and Tritax Big Box REIT (BBOX) because they offer reasonable returns and are growing businesses. I have also added Jupiter Emerging & Frontier Income Trust (JEFI) because I think it will offer reasonable returns, and topped up my holding in Saga (SAGA).

"I am thinking of investing in funds to try to get exposure to more areas. And I might add Informa (INF) and Phoenix (PHNX) as I think these are growing businesses, and top up Standard Life Aberdeen (SLA) and United Utilities (UU.) because I think these are well-run and defensive.”

Derek's portfolio

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You have a large portfolio, modest lifestyle and final-salary pensions, which mean that unless disaster strikes you could have a very comfortable retirement. This is a great position to be in. But are you working and saving too much? Do you need so much equity exposure, or should you think about locking in your wealth by holding more cash? It's the big questions about how this portfolio links into your life that deserve your attention, not the minor matter of which particular stocks or funds to buy or sell.

You say the portfolio needs pruning “a little”, and it does! It's wholly understandable how you got into such a position: a buy-and-hold strategy, and investing for a long time, will result in an overdiversified portfolio. 

While not disastrous, this has costs. You waste time researching individual investments that don't make a big contribution. For example, if a stock comprises only 1 per cent of your portfolio, even if it rises 50 per cent over a year – which would be a fantastic gain – it would add just one percentage point to your returns. That's only the difference between a moderately good and moderately bad day for the market.

And you are diversifying away the performance of good funds but still paying their charges. 

Wayne Berry, investment manager at Brewin Dolphin, says:

You seem to have made huge strides towards your retirement provision with the final-salary pensions, AVCs and stakeholder pension. Also consider making full use of your £20,000 a year Isa allowance as this could provide you with tax-efficient income once you retire.

Your cash balance is relatively high, especially if you count the NS&I holdings. But I would be nervous about adding to fixed income just now as rising interest rates will have a negative impact on the capital value of your existing bond holdings. So you could keep your cash allocation at the current level in the immediate future and reassess it periodically, especially if gilt yields rise in the next few years. Although cash can be frustrating at current interest rates it will help balance the overall exposure to equities.

Ian Forrest, investment research analyst at The Share Centre, says:

When it comes to your overall strategy I think a good starting point would be to decide if you need your portfolio to provide an income in retirement. If you believe your final-salary pension is sufficient to provide the income that you will, at least initially, require, it may be worth reinvesting a lot of the income generated by your portfolio. Given average life expectancy, if you retire at 55 you may find it prudent to keep your funds working for you for a few years.

If you're looking to retire within 10 years I would suggest lowering the risk of your portfolio by moving out of equities – especially small and mid-sized companies – and moving into more fixed-interest investments.

I appreciate that you may need cash for various expenses, but holding around 16 per cent of your portfolio in it for any length of time is far from ideal as it's not working for you. If you don't need to use this cash in the next few months you should look to reduce your allocation to it to around 5 per cent. 

There is no such thing as a guaranteed return when it comes to shares, but some are certainly more speculative than others. A long-term buy-and-hold strategy is good, but everyone has disappointments and holding on to them for a long time in the hope of recovery can often be a bad idea.  

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You can trim your portfolio in a number of ways. Assess your funds with higher charges. Consider whether they do anything that the rest of your portfolio doesn't. I suspect that if you look at it in this way, there could be a case for selling your cautious managed funds. I don't think that these add anything a mix of cash, bonds and equities couldn't achieve. And you also have large bond-like exposure: a final-salary pension is equivalent to an index-linked gilt – it pays an income that rises in line with inflation.

Also consider ditching your smaller holdings. If an asset accounts for only 1 per cent or less of your portfolio it won't add much to overall returns, even if it does well. You might kick yourself if you sell a stock which subsequently rises. But if you sell a bunch of them, you can diversify this risk.

Consider what is defensive. Insofar as it has a focus, this portfolio has a bias to defensive stocks. This is good: on average, over the long run, defensives have done better than they should around the world. There may be a good reason for this: bullish investors underweight them and overweight high-beta shares, causing the latter to be overpriced and defensives to be underpriced.

But some of your holdings might not be as defensive as you think. There's a risk that a Labour government will nationalise utilities with less than generous compensation. Utilities might have relatively little market risk or volatility, but they do have political risk. Granted, this danger might not materialise, in which case these stocks could rise nicely. But do you want to take this risk?

Another issue with this portfolio is its UK focus. This isn't necessarily catastrophic. It's possible that sterling will rise, causing losses on overseas equities relative to UK ones in sterling terms. And short-term market fluctuations are highly correlated across countries, which means there's little to gain from international equity diversification.

But it's possible that UK stocks have less long-term growth potential than overseas ones because of the types of companies they are – as well as exposure to the UK economy. If this is the case, you are missing out on some long-term growth by having little overseas exposure.

Wayne Berry says:

You don't panic and sell during crashes which stands you in good stead when investing. You say you have an average attitude to risk, so for a typical moderate risk investor we suggest the following asset allocation:

In addition to cash, NS&I savings and a stakeholder pension you have 70 investments. These are too many to monitor on your own. And the investment sizes appear imbalanced, probably because of your long-term buy-and-hold strategy. An example of this is having 3 per cent of your portfolio in National Grid (NG.), but only 1 per cent in Fidelity UK Index Fund (GB00BJS8SF95), 0.2 per cent in BP (BP.) and 0.3 per cent in BHP Billiton (BLT).

So consider a core and satellite approach, whereby funds and or index trackers form a larger, long-term core of a portfolio which is complemented by a few individual equities to add or reduce exposures.

Your are underexposed to global equity markets, so consider investing in Artemis Global Income (GB00B5ZX1M70), Scottish Mortgage Investment Trust (SMT) or RIT Capital Partners (RCP) to complement your holdings in UK equities and diversify your portfolio.

Another area to consider adding is infrastructure as, despite its political risks, we will always need it. This area offers attractive income and, in most cases, inflation-linked returns. It will also help to diversify your portfolio. Infrastructure has recently fallen in value following comments by the Labour party and the collapse of Carillion (CLLN). Ways to get exposure to this area include HICL Infrastructure Company (HICL) or Legg Mason IF RARE Global Infrastructure Income Fund (GB00BZ01WT03), both of which offer attractive income yields.

Ian Forrest says:

70 holdings are far too many for one person to monitor. So I would suggest reducing them over time to between 20 and 25, as you could comfortably achieve your desired risk and diversity with that number.

I would start by getting rid of the holdings which have a value of less than £1,000 as they are rather pointless in a portfolio worth nearly £800,000.

Your funds are heavily weighted to the UK and, while there is no problem with a home country bias, you have a significant amount of overlap in your portfolio. I would suggest reducing the number of UK funds while maintaining your overall weight to the UK. This would also help to reduce the costs within your portfolio and make its supervision far more manageable.