Overexposed to cash and a single company

"I worked overseas in management for five years during which time I didn’t pay UK National Insurance (NI) contributions,” says Will. “I didn't work for six years and because of this have an 11-year gap in my state pension contributions. But I can still get a full state pension if I am employed full time until age 65.

"Due to my time out of the UK I am finding it hard to find well-paid employment. For the past two years I have done a lot of temping in areas ranging from construction work to factory production lines, normally for about the minimum wage. Temping agencies often use external payroll companies who charge the employee for their services – £20 per week in my case. And on top of this I pay the employer's NI contributions as well as my own. So with tax I am paying roughly 38 per cent and my pay often falls below the national minimum wage.

"I have tried to claim income tax against my travel and clothing costs. However, HM Revenue & Customs (HMRC) requires evidence that my employer hasn’t already paid my expenses, and to date I have not been able to prove that I haven’t been compensated. As a temporary worker I do not get employer pension contributions.  

"I am seeking employment in my areas of expertise so my salary could significantly improve and I could get employer pension contributions.

"My partner works part-time, which more than covers her share of our costs, and she receives a small income in Japanese yen from royalties. She will be entitled to receive a small Japanese state pension although this may be limited to 10 years, and she makes NI contributions in the UK.

"Our combined income is around £26,000 a year, but mine is unreliable and I do not get paid holidays.

"Earlier this year, I transferred my personal pension into a self-invested personal pension (Sipp) and I make regular contributions to this which last year were on average £300 a month. We have not set a date for when we will retire, but when we do we would like to earn a combined income of at least £18,000 a year. I hope to be able to support my partner when she retires so our combined portfolio can grow – we are both in good health. This should be achievable if I continue to invest £300 a month, and the portfolio grows on average 4.5 per cent a year until I retire, so we are investing for growth.

"My partner has recently started a Sipp and can make contributions of close to 80 per cent of her earnings.

"She also has a cautious managed fund, but we sold some of this and reinvested some of the proceeds in regional equities funds. We will use the rest to purchase other funds. We did this to diversify globally and reduce management costs. My partner's Halifax funds have a medium risk level so we plan to put our other investments into a higher-risk mix of stocks and funds for the next five to 10 years.

"Our cash savings are mostly in Isas, including my partner’s help-to-buy Isa. But we discovered that we cannot use this as I have previously owned property.

"Last year wasn’t a great year for investments and the value of my pension fell about 14 per cent and the value of my partner's Sipp fell about 7 per cent. Our Isa portfolios have fallen by about 12 per cent since we opened them at the start of the 2018/19 tax year. Our trading accounts also suffered losses last year. Added to the costs of moving my pension and switching one of my partner's funds, this caused our combined portfolio to decline in value by 7 per cent between April and December 2018.

"I did a great deal of research when selecting these investments, but I think we have too many and am finding it hard to keep up to date with them. I would like to reduce the number but I'm reluctant to crystallise losses as well as incur more costs. We have taken profits on AJ Bell (AJB), and some of our holdings in Marston's (MARS) and ITV (ITV), but our direct equity investments overall are down on when we first invested in them.

"Due to uncertainty over the UK leaving the European Union (EU) I have been reluctant to set a stop-loss [an order placed with a broker to sell a security when it reaches a certain price]. Instead, we have continued to invest, especially in Lloyds Banking (LLOY), but I think it now represents a significant risk as the Brexit situation seems to go from bad to worse. Our large allocation to Lloyds Banking has suffered due to uncertainty over the UK leaving the EU.

"We hold many of the same funds and shares across our various accounts, for example, Lloyds Banking is in five out of six of them. And HSBC Japan Index (GB00B80QGM70), Schroder Tokyo (GB00B4SZR818), AXA Framlington Japan (GB00B7FSWP64) and iShares Japan Equity Index (GB00B6QQ9X96) hold some of the same investments as each other, such as Softbank (9434:TYO), Toyota Motor (7203:TYO) and Mitsubishi UFJ Financial (8306:TYO).

"I am also concerned that our portfolio has too much exposure to Facebook (FB:NSQ), Amazon (AMZN:NSQ), Apple (AAPL:NSQ), Netflix (NFLX:NSQ) and Alphabet (GOOGL:NSQ) in the American funds."

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You don’t want to crystallise losses. But the only good reason not to sell a fund of which the price is less than when you bought it is because you think it’s cheap. But if this is the case then switching into a passive fund means you could also be buying cheap assets. For example, AXA Framlington Japan and Schroder Tokyo might bounce back to where they were when you bought them. But if you switch these into a Japan ETF it too may rise as they recover.

Our choices are shaped by how our options are framed. If your frame is the vast number of funds in the market, you’ll be tempted to over diversify as a lot of these funds seem attractive. Economists, however, have a different frame. Our default position is the idea that markets are efficient, in which case the only equity investment you should have is a low-cost global tracker fund alongside as much cash as you need to keep risk down to your desired level.

You might think that this too simple - history tells us that markets are not fully efficient. Defensive stocks have been underpriced for years, as have stocks with a degree of monopoly power – what Warren Buffett calls economic moats. This helps explain why Facebook, Apple, Amazon, Netflix and Google/Alphabet (FAANG) have done well for years. But you are right to be jittery about these. It could be that investors wised up to their underpricing a few months ago, and in doing so drove their prices up in the autumn so that they had become overpriced. 

We can’t tell for sure how great this risk is: opinions aren’t facts. For me, it justifies trimming exposure towards something like a neutral level, which is what tracker funds have.

Lauren Peters, chartered financial planner at Fiducia Wealth Management, says:

Establishing your employment status should be a priority. You pay your employers’ NI but say you are unable to offset expenses because HMRC requires evidence that your employers are not paying your expenses for you. It’s possible to be a contractor/temporary worker on an employed or self-employed basis, and sounds like HMRC thinks you are employed so speak to them again. It can be a grey area but, typically, you are self-employed if you are able to pick and choose your jobs and could sub-contract work. If you can’t pick and choose your jobs, and are required to work at set hours or a minimum number of hours a week, then it’s likely you are employed.

Employers have a duty to auto-enrol employees into a pension scheme if they are aged between 22 and State Pension age, and earn between £6,032 and £46,350 a year. They are only permitted to delay enrolment for three months.

If you are employed you shouldn’t be paying employer’s NI, and should be receiving at least the minimum wage and paid holiday leave.

Check your State Pension record, which you can find via the government website at www.gov.uk/check-state-pension. If you have any gaps it may be possible to top up your provision by paying voluntary National Insurance contributions. But there are rules around doing this if you were abroad so it is not always financially worth doing so. In which case you can discuss your situation with the Pensions Advisory Service.

Well done on building up your personal pension and other investments despite your current employment instability. You are right to seek help at this point, however, as you sound quite panicked and admit that you are finding it hard to keep up. Stock picking is not an easy thing to do, especially if you are busy with your own job, are naturally cautious, and/or are trying to time the markets by frequently buying and selling.

Both you and your partner would benefit from a back-to-basics approach. I suggest speaking to an independent financial adviser who can get to grips with what it is you are trying to achieve. You say you have no set plans for retirement and are relatively young at 47, yet talk about a five- to 10-year timeframe.

Help-to-Buy Isas are only available until November 2019 as they are effectively being replaced by the Lifetime Isa. Both products were introduced to help first-time buyers with a 25 per cent contribution top-up from the government. Help-to-Buy Isas have come under criticism as the government bonus is only available upon completion of a house purchase, so they can’t be used towards a deposit – which is what most people need the money for. Holders have until December 2030 to use the government bonus.

If you think you will never use this account for a property purchase, it may be worth transferring it into a stocks and shares Isa. Unfortunately, your partner cannot transfer it to a Lifetime Isa as she is over age 40.

Phillip Wong, investment manager at Redmayne Bentley, says:

No one likes to crystallise losses but investing is about opportunity cost. So, although you are reluctant to sell the losing positions, you need to assess whether your money could be allocated to other investments with better prospects that fit your overall objective.

Across your Sipp and Isa portfolios the average loss is approximately 11 per cent. Your current investment strategy is high risk with nearly 100 per cent in equities [excluding the cash allocation], and explains why your investments' falls were in line with the market. 2019 is an uncertain environment for investors and you may need to brace yourself for another volatile journey with your current portfolio positioning. The case for diversification has never been more important – especially as the support levers which have propped up markets have come to an end.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You are over diversified. This doesn't just result in your funds having some of the same holdings as each other and your portfolio being difficult to monitor. If you hold many actively managed funds you diversify away any good performance that one or two funds might offer but still pay their active management charges. The upshot is that you end up with an expensive tracker fund.

Even a small amount in extra charges compounds over time. An additional management fee of 1 per cent a year over 10 years would cost almost £1,500 for an investment worth £10,000.

Think about simplifying your holdings by cutting some of your actively managed funds. This will incur some dealing costs now but save you money over time.

Your huge holding in Lloyds Banking is a big issue. This massively unbalances your portfolio and exposes you to a lot of risk. This is only justifiable if it is the cheapest stock in the market which is implausible. I know you’re reluctant to sell at a loss. But put it this way. In what circumstances would Lloyds Banking do well? Most likely, ones in which the UK market generally does well either because Brexit is resolved satisfactorily or global markets recover. If this happens most UK stocks and funds will do well. So selling Lloyds Banking to buy, say, a UK tracker fund would give you a more balanced portfolio while mitigating any regret you’d feel if Lloyds Banking recovers.

Lauren Peters says:

You are very over exposed to Lloyds Banking, with about a quarter of your portfolio in it. You are putting a lot of eggs in one basket. You think that you have over diversified, but over 70 per cent of your portfolios are in equities and a large proportion of these are UK equities, mainly due to that Lloyd’s holding.

About 20 to 30 holdings should be enough. If you get advice from an experienced independent financial adviser or investment manager they could create a well-diversified portfolio that meets your risk profile and time horizon. They would also be able to choose funds or stocks that have good fundamentals. If you are looking for growth your funds should be invested in companies that have good research and development budgets, and a solid business strategy for growth in the right market conditions to achieve this. You have to pay for good independent financial advice, but it should more than pay for itself over time due to the access to professionals, quality research and expertise that it affords you. And you will probably sleep better at night!

You have a lot of money in cash. It’s advisable to have cash savings for emergencies worth around three to six months’ expenditure. You have a joint income of £26,000 a year so you have over three years’ worth of emergency cash savings. Are you planning on using this for a property purchase?

Phillip Wong says:

It sounds like you have done diligent research when selecting your investments, but it is difficult to monitor these positions and generate fresh ideas. You have some geographic diversification but also need asset class diversification.   

I would look to build on some of the funds you already hold and create a portfolio of core holdings which include Fundsmith Equity (GB00B41YBW71) and Lindsell Train Global Equity (IE00B3NS4D25). The funds' managers, Terry Smith and Nick Train, have impressive track records: they came out positive in a difficult 2018 and have delivered outperformance over a longer period.

Your percentage weighting to Lloyds Banking is too high, and this would be the case even for investors with the highest risk appetite. If there is a no-deal Brexit UK growth is forecast to slow and the company could be particularly vulnerable given its domestically-focused operations. Reducing the Lloyds position would allow for a more diverse UK allocation.

Consider some exposure to income generating equity funds which could participate in any market rallies while delivering income that could be reinvested. The effect of any market pullback would be dampened somewhat by the income they pay.

For more growth potential, consider CFP SDL UK Buffettology Fund (GB00BF0LDZ31) which has been a consistent top performer since launch by following a strategy that focuses on high returns on equity, strong free cash flow and sustainable operating franchises. This fund's manager, and Mr Smith and Mr Train, take a conviction approach whereby they focus on businesses they truly believe in.

You could improve asset class diversification by adding LXI REIT (LXI) which aims to deliver inflation protected income and capital growth by investing in property such as student accommodation, hotels and car parks. The fund's managers have a very good record of managing its assets and since launch it has made a net asset value return of over 20 per cent. Recent further accretive acquisitions should stand the fund in good stead going forward.