Review your large legacy holdings

"I hope to build up a sum of at least £260,000 by the time I am age 75 in easily tradeable assets,” says Charles. “This is to provide additional tax-free income from within an individual savings account (Isa) to cover care fees for myself. 

“I have been investing for five years, and save £1,000 per month and further random amounts throughout the year into investments. I think I have a high risk appetite as I would be prepared for the value of my investments to fall up to 30 per cent in any given year. If any of my investments fall 50 per cent or more I sell them.

"I have a concentrated number of holdings with a bias to the US and global funds. For example, I have recently added Vanguard S&P 500 UCITS ETF (VUSA), as well as Legal & General (LGEN) and GlaxoSmithKline (GSK). I am also thinking of investing in Scottish Mortgage Investment Trust (SMT) and Standard Life Investments Property Income Trust (SLI), and adding to Legal & General. I have £23,671 cash in my investment Isa which I plan to invest.

"But I may sell my holding in BMO Commercial Property Trust (BCPT)."

Charles' savings and investments

Charles' wife's savings and investments

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

There’s a lot I like here. Most importantly, your objective of having £260,000 in eight years’ time seems reasonable, as long as you continue to save £1,000 per month. With around average returns you won’t even need to be fully invested in equities to achieve this.

I applaud your large weighting to exchange traded funds, which provide exposure to diversified equity portfolios with lower fees than active funds

I also applaud your large weighting to exchange traded funds (ETFs), which provide exposure to diversified equity portfolios with lower fees than active funds. This is a good thing because fees compound horribly over time.

Some readers might think it odd that you have no emerging markets exposure, and they have a point. There are tentative signs of an upturn in the Chinese economy and, if these become stronger, emerging markets might well perform well and you would miss out. But you do have some indirect exposure to these in that a cyclical rise in emerging markets would very likely be accompanied by a rise in the S&P 500 index.

Emerging markets also carry downside risk and do especially badly in global bear markets. So you are not very wrong not to hold them directly.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says:

Assuming eight additional years of monthly contributions and no more random contributions, you would need your investment portfolio to return 5 per cent a year after charges and tax to hit your target sum. This is in line with typical long-term market performance without taking enormous amounts of risk.

However, if you retain £23,671 of your investment Isa in cash, the return on the invested portion will need to be 7.5 per cent a year, which would mean moving further up the risk scale. So consider how much cash you really want to hold in this way.

If your £20,000 cash Isa is an easy-access account this is a decent emergency fund. It would also mean that you could leave the NS&I Index-linked Savings Certificates untouched. These are the only tax- and risk-free inflation-proof savings products available and you can’t buy any more of them, so keep them for as long as you can.

As you are a higher-rate taxpayer you should hold your investments within an Isa. You haven't said how much of them are within an Isa, but it’s worth taking advantage of your full allowance each year. You can invest up to £20,000 of new money into an Isa each year, or use the 'bed and Isa' process to switch investments outside tax-efficient wrappers into Isas each year. [This involves selling investments each year with gains worth up to the annual capital gains tax allowance, which is currently £12,000, and buying them back inside your Isa].

Venture capital trusts (VCTs) have tax advantages, but are high risk. Also, the capital in them isn’t always easily accessible and selling shares in them too early can mean that you lose the tax benefits. As accessibility is important to you this rules them out.

You said that the goal of building up a sum of £260,000 by the time you are 75 is specifically for you rather than your wife. But as you are a higher-rate taxpayer and she’s a basic-rate taxpayer, consider transferring income-producing assets you hold outside Isas into her name to take advantage of both your tax-free dividend allowances of £2,000 each a year, and pay a lower rate of tax on the excess. She can then move the assets into an Isa using the bed-and-Isa process.

Rory McPherson, head of investment strategy at Psigma Investment Management, says:

Your investment goal seems fairly sensible. Your and your wife’s Isas are worth about £170,000 in total, so £260,000 in eight years’ time is achievable if you are heavily invested in equities and make an average annual return of 5.5 per cent. If you make decent contributions to your investments as well, using as much as possible of both your own and your wife's £20,000 annual Isa allowance, the amount you end up with could be considerably more.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

I like venture capital trusts (VCTs). The case for these is not that they have nice tax breaks – this might even be a disadvantage insofar as it encourages too many investors into this sector. Rather, it is that growth companies – if there are any – are increasingly less likely to be quoted on public markets. So if you want growth companies you should look to VCTs or private equity.

But these types of funds carry more manager risk than funds that invest in quoted stocks because of the nature of individual company performance. Managers of private equity funds hope that one or two big successes will more than offset the losses which are inevitable with many smaller, speculative companies. One or two successful investments can make a huge difference to their performance. For this reason, it is wise to diversify across managers to a greater extent than with funds of listed stocks.

However, with such assets you are taking on liquidity risk. You want 'easily tradable' assets but we cannot rely on VCTs and property funds to be such because they invest in illiquid assets. If open-ended property funds face a wave of redemption requests they might have to stop investors taking their money out of them for some time. This would be especially likely in an economic downturn, when investors turn unusually pessimistic about property [and closed-ended property funds might swing to wide discounts to net asset value. There is also not much of a secondary market for VCT shares].

This is not necessarily catastrophic as, in principle, longer-term investors should be rewarded for taking on cyclical and liquidity risk. So for now you might feel able to bear this risk. But as you get older and might need to raise cash, you may want to get out of them.

I find it odd that you have a large weighting in two specific stocks – Legal & General and GlaxoSmithKline. This exposes you to more company-specific risk than many other investors would be comfortable with. Although this risk is modest because these are relatively defensive stocks I still think you should review these holdings. Do they reflect a genuinely well-founded optimism about the prospects of these companies – more than for any others on the market? Or are they a legacy of past decisions? It’s easy to end up with portfolios like my garage – full of stuff I once had good reason to buy but which lacks a purpose now!

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says:

You need a balanced portfolio of assets to meet your growth target. But over 12 per cent of your savings and investments are in the shares of just two companies – Legal & General and GlaxoSmithKline – and you intend to buy more of the former. This is a heavy allocation to just two companies' shares, so consider greater diversification via funds or by investing in other different shares.

You have a preference for North America and global funds. However, your investments currently have little global exposure but do have a particular emphasis on the US due to your holding in Vanguard S&P 500 UCITS ETF (VUSA). To diversify across international markets, I suggest Legal & General International Index Trust (GB00B2Q6HW61) or, if you want active funds, Rathbone Global Opportunities (GB00BH0P2M97) and Artemis Global Income (GB00B5ZX1M70).

Rory McPherson says:

Your investments are heavily skewed to what we’d class as growth stocks in the form of US equities, and sectors such as technology and healthcare. These areas of the market have been big beneficiaries of low interest rates, but wouldn’t find life so easy if bond yields rise.

I would encourage you to diversify away some of this risk. Speak to a financial planner on how to do this – even if you only have one consultation. It may well be the case that with an income of around £80,000 a year after tax that you and your wife could afford to invest some of the lower-risk assets, such as the nearly £50,000 you have in NS&I products. This could mean that your investments do not have to work so hard and you could diversify the risk – even though you say you are willing to tolerate high risk. 

[You can find independent financial advisers at www.unbiased.co.uk]

You tend to sell investments if they fall by more than 50 per cent. This is a very real possibility in equity markets and 10 years into an equity bull market something that could conceivably happen in the next eight years. So I'd suggest trimming some of your concentrated exposure to growth stocks and explore ways of diversifying your investments.

You could do this by investing in the sterling hedged share class of Legg Mason IF RARE Global Infrastructure Income Fund (GB00BD3FVT86) and MI TwentyFour Dynamic Bond Fund (GB00B5VRV677).

You could get some dependable income and diversify stock-specific risk by consolidating some of your UK equity holdings into a fund such as Royal London UK Equity Income (GB00B8Y4ZB91).

A fund such as Jupiter Absolute Return (GB00B6Q84T67), meanwhile, might be a good way of dampening down risk and trimming back some of your investments' growth bias. Its manager, James Clunie, has a bias to UK domestic stocks and short positions on US growth stocks.