Consider your family’s wider objectives and priorities

“I want to leave money to my wife if I die before her,” says Richard. “We also have a daughter who is unable to work due to ill health and lives with her husband. We already help them financially and will pass our assets onto them after my wife and I die.

"I have enjoyed investing in equities for more than 40 years. I started by investing in a company called Murumba Oil, which discovered oil in Australia soon after, and I became hooked! I consider investing to be gambling and great fun, but I also do quite well. In terms of buying and selling investments, I rely on instinct rather than logic or knowledge.

"I have recently invested in Alliance Pharma (APH) and Anglo American (AAL), and am thinking of investing in National Grid (NG.), YU Group (YU.) and Majestic Wine (WINE).

"I hold all my equity investments in an individual savings account (Isa)."

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

Chris Dillow, Investors Chronicle's economist, says:

Although you regard investing as gambling and fun, you have actually built a portfolio that is probably no riskier than what investors looking to reduce risk put together. There are two reasons for this.

Although many of your holdings are risky some of these risks are uncorrelated. For example, a lot could go wrong with Eland Oil & Gas (ELA) or Quixant (QXT), a maker of gaming machines. But the two risks are independent of each other.

And while some of your stocks are speculative, many are not. Holdings such as AstraZeneca (AZN), Diageo (DGE) and Royal Dutch Shell (RDSB) have relatively low volatility so bring down the overall risk of your Isa portfolio, meaning it probably isn’t much riskier than a market tracker. This is an example of what economist John Kay calls obliquity – how we can achieve some things without trying.

Richard Hunter, head of markets at interactive investor, says:

You are in an interesting financial situation, both in terms of your assets and attitude to risk. A traditional financial adviser might question the make-up of your finances, although in the absence of the full details, for example, the value of your mortgage-free property, it is difficult to assess properly.

Your income requirements appear to be catered for and you also seem to have an adequate amount of 'safety money' set aside for yourself and your wife. However, you do not say where you hold all of this money or what interest rates you are getting on it.

You also need to consider tax planning, in particular with regard to inheritance tax, although your equity portfolio is sheltered from some tax because you hold it within an Isa.

Henry Fox, private client manager at Seven Investment Management, says:

You have built up almost £1m within your Isa, which shows the long-term benefit of a disciplined approach in terms of using your allowance each year. You can now draw down from this asset base tax free and this provides you with greater flexibility.

Your wife can also inherit your Isa, in which the assets can remain.

Your portfolio is exclusively invested in equities, but as you "see investing as gambling and great fun", you are presumably comfortable with the volatility such a strategy entails. At time of writing your portfolio had fallen significantly as markets had sold off – you have no diversification within the Isa with which to reduce any of the downside.

I would suggest reconsidering your objectives for this money. You "enjoy investing in equities" but are looking to possibly leave money to your wife. So think a little differently, and consider your family’s wider objectives and priorities. It is unclear, for example, if you or your wife require income from these assets or from where you provide the financial support to your daughter. In my opinion, your family’s circumstances and goals both in the short and long term should dictate your investment strategy, together with your passion for picking stocks.  

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

There are four issues you should consider.

Some readers might think your portfolio is too UK-focused. I’m not so sure. You have plenty of multinationals that might benefit from a fall in sterling, and I suspect there’s a good case for avoiding emerging markets for the time being.

But one concern I do have is that that you are incurring more dealing charges than necessary. Ordinarily, I’d advise readers to minimise these. If, however, you think of investing as fun, you might regard them as the cost of your hobby, in the way that other people think of golf course fees or the price of guitar strings.

Speculative stocks are on average overpriced and offer low returns. The Alternative Investment Market (Aim) index has hugely underperformed the FTSE All-Share index since its inception in 1995. Investors pay too much for the small chance of huge returns and overestimate their abilities to foresee future growth.

There is an element of cyclical risk in this portfolio. A global economic downturn would probably hit commodity and building stocks such as Somero Enterprises (SOM), Ferguson (FERG) and Ibstock (IBST). As it would probably also depress investor sentiment, it would be likely to hurt your more speculative shares too.

It’s not obvious, though, how much you should do about this. In the near term, cyclical risk might continue to pay off: the US economy, at least, looks like it will grow well for a few months. And your defensive holdings provide some protection against this risk.

However, big defensives might now be overpriced. Unilever (ULVR), Diageo, AstraZeneca and Relx (REL) have all done very nicely over the last five years. I suspect this is because investors have wised up to the fact that stocks with a degree of monopoly power, such as comes from having strong brands, have in the past been too cheap. This is partly due to them emulating Warren Buffett’s approach. But having learned from this mistake investors might now have over-corrected with the result that they are paying too much for what Mr Buffett calls “economic moats.”

That said, all stocks carry some sort of risk and you seem to be spreading such risks reasonably well.

Henry Fox says: 

Your Isa portfolio is mostly exposed to UK equities. Although many of your holdings are global, I would still suggest adding regional diversification. In markets you are not familiar with, in particular areas such as emerging and frontier markets, think about investing in actively managed funds.

By investing across regions you will benefit from increased currency diversification which we think is important in the context of ongoing Brexit negotiations.

If your priorities and circumstances lead you to thinking differently about the risk you want to take, I would suggest diversifying your asset class exposure. Even our most adventurous strategy currently has just over 80 per cent – rather than 100 per cent – in equities. It also has a small allocation to fixed income and some alternative assets.

You might want to consider what your wife and daughter will want to achieve from these assets and how this might inform the investment strategy. For example, they might want to increase the diversification and choose fund managers to run certain aspects of the portfolio if they do not share your interest in financial markets.

Richard Hunter says:

You see investing as "gambling and great fun” and rely on instinct rather than logic or knowledge. But as you have been investing rather than gambling for more than 40 years, this could just be a self-effacing observation. Although you do not say what the acquisition costs were, your Isa is nearly £1m in value and it is likely that you have built it up with more thought than you are giving yourself credit for.

Your Isa portfolio is fairly broad-based with a good element of business and geographical diversification, underpinned in places by some quality blue-chip names. But you have 31 holdings in it which makes it harder for you to keep up to date with the varying fortunes of the individual companies. Your Isa portfolio is also slightly overweight oil and mining stocks, with the former accounting for about 16 per cent of it, perhaps as a result of your early success with an Australian oil stock?

Your Isa portfolio seems more focused on capital growth and has an average dividend yield of just 2.6 per cent, with some of the stocks in it paying no dividend at all. By way of comparison, the dividend yield of the FTSE 100 was 4.3 per cent at time of writing. And it is arguably less risky than the constituents of your Isa portfolio.

But you do have 11 FTSE 100 companies in your Isa which provide an element of stability, and it is fairly evenly balanced with most of the stocks in it accounting for about 3 per cent of its value. This should add some extra protection in terms of diversification. But some holdings account for more, for example Eland Oil & Gas and Future (FUTR), so you could consider trimming them.

The other noteworthy feature of the portfolio is the home bias – the tendency to stick with domestic shares which means you miss out on the benefits of geographical diversification. However, although your Isa portfolio is only invested in UK-listed shares, the home bias is mitigated because a number of these companies have operations and earnings from overseas, giving some diversity.

Eland Oil & Gas (ELA) in focus

One of our reader’s largest Isa holdings is Eland Oil & Gas, which focuses on production and development in Nigeria. This Alternative Investment Market (Aim) company has two key assets.

Eland Oil & Gas has a 45 per cent stake in the OML 40 licence which is for an area of 498 square kilometres in the Niger Delta. It includes the Opuama oilfield which was producing 25,000 barrels of oil per day as of July 2018.

Eland Oil & Gas has a 40 per cent interest in the Ubima licence which is for an area of about 65 square kilometres in the northern part of Rivers State. The company is assessing this area and will be entitled to 88 per cent of production cash flow from Ubima field until costs have been recovered.

Last month Investors Chronicle downgraded the company from a Buy to a Hold rating, and we classify it as speculative and high risk. Alex Newman, features editor at Investors Chronicle, said:

“In the six months to June, Eland Oil & Gas’s gross daily production increased threefold to 17,000 barrels of oil per day, has since notched up to 30,000 and is expected to climb further before 2018 is out. That production bounce, and a $32 (£24.64) a-barrel increase in average realised prices contributed to a near-tripling in operating cash flow to $50.6m, and a first maiden profit. A surge in receivables to $43m was perhaps the one fly in the ointment, though the net cash balance has risen to $32m since the period end. And the second half promises new production from Gbetiokun and the extension of the group’s debt facilities.”