How to manage a smaller portfolio

“I can live comfortably on my pensions income so do not have specific goals for my investments,” says Myrtle. “I also have about £10,000 in a savings account, which I draw on for larger purchases such as holidays. But I hope to keep growing them over time, rather than the portfolio treading water – as it has been since January 2018.

"The interest rate on our mortgage has been very low for many years at 0.5 per cent above base rate. I expect that we will probably have to sell our home when the mortgage comes to an end in 2026, but our housing needs are changing so we are playing that by ear. I do not have children, so do not feel obliged to use my investments for anyone but myself, but do not have any ideas on what I might need the money for. That said, if my partner, who is in failing health, needs something then I would draw on the investments to fund it. Also, my partner gets a car via The Motability Scheme [which enables those receiving a higher-rate mobility allowance to lease a car]. So if she dies I will have to buy one for myself. I think she has around £30,000 left from a legacy from her mother, but I doubt this will last much longer.

"I used to put savings into a building society or savings account, but in 2008 I decided to be a little more adventurous and try my hand at investing. I started buying direct shareholdings and it was a successful strategy for some time but, in retrospect, I think it may have been a case of a rising tide lifts all boats. I made some significant losses on Dignity (DTY) and Carr's (CARR) in early 2018. More recently, my holding in Costain (COST) made me realise that I do not spend enough time following what is going on in markets and that I am not really a share picker.

"So in 2014, when I invested £3,000 in my individual savings account (Isa) after selling my boat, I also bought two tracker funds, and in 2016 I bought Schroder Oriental Income Fund (SOI). I now only put my money into investment trusts and tracker funds, although I have held on to some of the direct shareholdings I had acquired. And earlier this year I invested £599 in iShares Diversified Commodity Swap UCITS ETF (ICOM).

"I have tried to follow a strategy of allocating 80 per cent to equities and 20 per cent to fixed interest. But I found it quite difficult to decide what investments to hold to express this allocation and I have let things drift. I would now like to sell some or most of my holdings and reinvest the proceeds, balancing the portfolio with a well-diversified range of investments. I do not want to add more direct shareholdings as I do not have time to monitor more than I have now, and recently sold shares in AstraZeneca (AZN) worth £1,346. I also reduced my holding in Herald Investment Trust (HRI), selling shares worth £574, to balance the portfolio.

"I find it hard to decide what to invest in because of all the talk of recession and Brexit. I would like suggestions on what funds I could invest in to balance my portfolio, in particular passive tracker funds. I would be uncomfortable taking any investment risks that would threaten my basic lifestyle. That said, I do not rely on the investments to fund this. But I still don’t think it would be sensible to risk the value of the capital growth I have achieved so far."

Myrtle'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:

The first question you should consider when reviewing your portfolio is whether you have the right mix of safe and risky assets. Your cash of about £4,800 (which excludes the £10,000 you have in savings accounts) and index-linked bond mean that around a quarter of the investment account is in safe assets.

You do not rely on this money to fund your day-to-day expenses so you could afford to take some risk. But your desire not to jeopardise the growth your investments have already achieved suggests that you should take a more cautious stance. Ultimately, whether this is the right proportion is a subjective matter, so don’t feel the need to follow rules set by others.

You find it hard to decide what to invest in because of all the talk of recession and Brexit. This is entirely natural – it’s normal to do nothing when faced with uncertainty and this is a reason why companies are investing so little at the moment. But because so many others behave like you it means that uncertainty is already in the price. For years, there has been a strong correlation between global policy uncertainty and the dividend yield on the FTSE All-Share index, with more uncertainty meaning higher yields.

And this is good news. History tells us that the dividend yield is a wonderful predictor of equity returns, especially over longer time horizons such as three to five years. This suggests that uncertainty is giving us a buying opportunity, and that if or when uncertainty recedes yields should fall and share prices should rise.

But this isn’t a certainty. If the US enters recession shares will fall, though, and it's only an 'if' for now. This is because investors do not anticipate that tougher economic times will make them more reluctant to take risk. It does, however, suggest that you should change your perspective. It's not only a question of whether you feel like buying equities, but whether their prices are now sufficiently low that you will be well-rewarded for doing so. And the answer might be yes.

Keith Bowman, equity analyst at Interactive Investor, says:

Establishing some goals and aims when investing is important if you want to reach your final destination. Although the core aim or final destination for your investment portfolio is not crystal clear, you have established enough information to set a course.

As you do not have a clear end goal, for example, repaying your mortgage or covering medical bills, you need to have flexibility and easy, quick access to the funds. You have sufficient pension and benefits income to cover daily living expenses and do not rely on the investments, and have indicated that you would like the portfolio to increase relative to the position it was at in January 2018. This suggests a capital growth objective, although you do not appear to have much propensity to take risk. You also wish to preserve the value of the growth your investments have already achieved, and your age and the fact that your partner's health is failing suggest that this is appropriate.

You hold your investments in an Isa, which is sensible as it means they do not incur tax and are relatively accessible if, for example, you need any money to cover an emergency such as medical bills.

Ben Yearsley, director at Shore Financial Planning, says:

You seem to be in a solid financial position as you do not need to draw on your investments to finance your everyday expenditure or holidays.

One obvious question is whether you and your partner have written wills – your shouldn’t automatically assume that you will inherit your partner's half of the home you jointly own, or vice versa, when one of you dies. So if you haven't, do it.

You are uncomfortable with investment risks that could threaten your basic lifestyle, but as you are not drawing on your investments for anything specific or relying on them, what happens to this pot should have no real bearing. That doesn’t mean you should gamble with it, but any gains are an added bonus that might pay for something extra.

Keeping £10,000 in cash for emergencies is sensible, but make sure it is in an instant-access account that pays a reasonable interest rate.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

The composition of risky assets in this portfolio is generally OK. Most of your investments are not active funds with high charges – I like that you have tracker funds.

But a default portfolio should comprise only safe assets plus a global tracker fund, for example an exchange traded fund (ETF) that tracks MSCI World index. You should only add other assets to embody particular beliefs you have about specific markets, sectors or strategies.

Your current asset allocation gives additional exposure to the global economy via two emerging market funds and a commodity ETF. Commodities and emerging markets often rise and fall together, so I’m not sure how wise this is. The inverted US yield curve and threat of damage from the trade war makes me think not. But the recovery in Chinese money stock this year, albeit a weak one, is a lead indicator of better economic times for China hence a rise in commodity prices. And we are at the time of year when exposure to risk usually pays off better.

But I personally, on balance, wouldn’t want much more exposure to emerging markets and commodities than you have.

Keith Bowman says:

As you want to lock in gains made to date and have a preference for funds rather than direct shareholdings, having made losses on the latter, consider fully disposing of your holdings in AstraZeneca and Costain. This would reduce the risk of your investment portfolio and lock in gains generated by AstraZeneca over recent years.

With regard to how you would reinvest the proceeds of such sales, Brexit uncertainty, the US-China trade war and broader concerns about a global recession make investing particularly difficult at the moment. So consider drip-feeding money into the stock market using any monthly investment facility offered by your Isa provider over, say, 12 to 18 months, so you do not incur the problem of market timing.  

To further reduce risk and remove the burden of selecting funds in particular geographical regions, consider making monthly investments into global equity funds you already hold, such as F&C Investment Trust (FCIT). This is the oldest investment trust, having been launched in 1868, and aims to grow its capital and income over the long term. Alternatively, iShares Core MSCI World UCITS ETF (SWDA) is a low-cost global tracker fund that aims for capital growth over the long term.

Ben Yearsley says:

I don’t think you have a large enough portfolio to be able to invest directly in shares. If you hold a basket of shares, you should have about 20 to diversify the risk. Also, more importantly, you need to spend a lot of time monitoring them – good or bad newsflow in current markets makes shares soar or plummet quickly. So I would sell your remaining direct shareholdings. It’s not about whether they are good or bad, rather it is about the composition of your overall portfolio.

You appear to want your investments to go steady rather than all out growth, but some of the holdings, such as Baillie Gifford Japan Trust (BGFD) and Herald Investment Trust (HRI), don't fit in with this aim. Despite this, I would stick with these two particular ones as they are excellent long-term holdings.

I don’t really have an issue with any of your holdings, other than the direct shareholdings, but I struggle to see the logic of the portfolio. What is the overriding aim? For example, why hold iShares Core MSCI World UCITS ETF and Vanguard Global Value Factor UCITS ETF (VVAL)? There’s cross-over of underlying holdings here. Also, why not hold one FTSE All-Share index tracker, rather than FTSE 100 and FTSE 250 trackers?

I would consider adding some investments, though not high-risk, potentially high-return ones. Personal Assets Trust (PNL) is a perennial favourite of mine: it seeks to protect and grow wealth over time by investing in shares, bonds and gold. Also consider TIME Defensive Income Securities (GB00BZ17GL78). Although it holds 3i Infrastructure (3IN) so would duplicate one of your existing holdings, it provides diversified exposure to renewables and listed infrastructure funds.