Avoid selling in falling markets

"My state and widow’s pension are probably about £10,000 short of my annual expenditure, and would not cover occasional expenses such as a new car,” says Muriel. “So my overall objective is to remain financially secure by having a sustainable investment portfolio. I would like moderate growth above inflation, even if I withdraw up to £20,000 in some years to cover unexpected expenditure. But I will not to need to make such withdrawals in the near future because I have sufficient cash. 

"I don’t plan to draw from my self-invested personal pension (Sipp) so I can pass it onto my family.

"I am in good health and wish to remain in our family home for as long as possible. I and my late husband intended for our investments to cover care costs, if necessary. But if I do not need the money for this our families and chosen charities will benefit.

"My husband and I discussed and shared all financial decisions, so managing the probate, and consolidating and rationalising 10 investment accounts held across four investment platforms was a massive challenge. But it has reinforced my desire to remain in control of my investments.

"If the value of my investments fell I would sell enough of them to have a comfortable cash reserve. I used to have a medium attitude to risk, but this is decreasing because my pension income has halved. And a few years ago we recognised our inability to react quickly enough to the volatility of apparently stable, direct share holdings. So we invested in active funds in sectors that didn’t seem too volatile. The direct share holdings I still have are long-term holdings that pay good dividends.

"Some of the investments I added more recently are wavering above and below the 200-day simple moving average [the average closing price of a security for the last 200 days]. But I'm not sure if that is a good benchmark for the funds I bought in this phase of the markets.

"I favour active funds whose total returns have beaten inflation, and of which the performance returns are in the first or second quartile of their sectors. But I wondered how well diversified my investments are, in particular those in my Sipp, and the maximum amount I should invest in any one fund? I currently look not to put more than £50,000 into any one fund.

"I feel reluctant to invest in emerging markets even though this area has made good returns for me. I'm also not sure about property funds because in 2016 I held two which were suspended from trading.

"My global funds seem to have adequate North America exposure, so I'm not sure if my regional funds enhance or diversify the investments. 

"I have never researched ethical funds, but if there are ones that would generate reasonable returns, comparable to those of my existing holdings, I would consider them."

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You have quite a defensive portfolio. You have quite high cash and bond weightings, and relatively few riskier holdings such as emerging markets funds and mining shares. The large holding in Barratt Developments (BDEV) is one of your few cyclical investments. This means that you might miss out on returns. If the world economy picks up this year, and there are tentative signs from the eurozone and Japan that it might, cyclicals such as miners and emerging markets could do especially well. 

If capital preservation is your priority, this is not a problem. Decent returns on such stocks, which are by no means assured, are only a reward for taking on extra risk. But avoiding volatility means missing out on some great returns.

Tracker funds require less research than active funds or direct share holdings, and can create, simple well diversified portfolios that are easier to monitor. Just two assets – cash and a global equities tracker fund – do most of the work that some investors need. So if investing becomes more of a chore for you, but you still want to run your investments, consider simplifying your portfolio rather than totally outsourcing its management.

Freddie Cleworth, chartered wealth manager at EQ Investors, says:

When considering your overall objective – to remain financially secure with a sustainable investment portfolio – you need to evaluate what this means for you in monetary terms. Making withdrawals of up to £20,000 per year from your individual savings account (Isa) and unwrapped investment account, which are worth about £1.24m, equates to a withdrawal of 1.6 per cent each year. This seems eminently feasible in most market conditions and could be done very tax-efficiently, as most of the assets are within the Isa. This also means you could preserve the Sipp for family beneficiaries.

To achieve moderate growth above inflation, perhaps 4 to 5 per cent a year in nominal terms, does not require you to take significant risk, but rather have investments that are well diversified across different assets and exposures.

Your regular annual expenditure is roughly £30,000 a year, not accounting for one-off expenses such as a new car. Your building society cash of £140,000 would cover a few years of essential expenditure, so think about what total amount cash you might need to feel comfortable with. Holding excessive cash means assets that could be invested are eroded by inflation, but it is preferable to avoid selling investments in falling markets to raise cash.  

With regard to your longer-term strategy, instead of monitoring moving average indicators I would focus on fundamental analysis. So consider intrinsic value via economic factors or outsource this to a good fund manager. Investing via diversified active funds spreads your risk, and your investments are run by professionals who monitor markets closely and react when necessary.

Thomas Dawson, investment manager at Redmayne Bentley, says:

You aim to remain financially secure by having a sustainable investment portfolio that delivers growth above inflation, including after withdrawals of up to £20,000 in some years. Your investment accounts, excluding the Sipp, are large enough to achieve this.

Your overall portfolio is probably at the higher end of the medium-risk range, but you could achieve your objectives with less potential for variability and risk.

If your portfolio falls, you look to sell enough of your holdings to have a comfortable cash reserve. But you can achieve what you want with a smaller value invested, so it may be a good idea to determine what you feel is a comfortable amount of cash and, if necessary, increase your allocation to it. Having a cash buffer is important component with a sustainable long-term strategy as it is necessary to be able to sit through market downturns without selling. You can reduce the overall risk of your portfolio with direct holdings in UK gilts (government bonds) that have a range of short to medium term maturities. Although their return to maturity is low, so is their default risk.

First draw income from the investments held outside tax-efficient wrappers or raise cash. Make a priority of selling the direct share holdings and reinvesting the proceeds in funds, as this will mean that you do not have to react quickly to news.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Your holdings might be more concentrated than you think. Finsbury Growth & Income Trust (FGT), Murray Income Trust (MUT) and City Of London Investment Trust (CTY) hold similar stocks to each other – large UK defensives with some monopoly power. They are not to blame for this: if a UK equities fund wants to pay big dividends its options are limited. But it means that they are focused on a particular market segment. Some of your funds that invest in overseas equities are also heavily exposed to big, monopoly-type defensives.

Such holdings have done well for a long time, but their good performance might indicate that investors have wised up to their merits. A few years ago, investors underpriced the virtues of monopoly power. But in recent years they’ve heeded US high-profile investor Warren Buffett’s strategy of buying stocks with 'economic moats' [ competitive advantages over rivals]. This could mean that such stocks are now fully priced so will only deliver modest returns and might even fall.

But this is a risk not a certainty. Defensives have been underpriced because some fund managers avoid them, as they do not want to underperform in rising markets. And this cause of underpricing remains.

So you are wise to monitor 200-day averages. Selling when prices fall below this has been sensible because it has meant getting out ahead of long and big bear markets. If large defensive stocks have become overpriced, meaning that they will suffer a long-term reversal, this strategy should protect against losses.

But selling when prices fall below 200-day averages can result in trading too often if prices wobble around the average. And it can mean missing out when shares bounce back from dips. However, you can reduce the risk of this happening by only reviewing your portfolio occasionally – no more than once a month – and only trading when prices deviate more than a few per cent from their 200-day average.

Freddie Cleworth says:

I agree that it makes sense to shift your investments into funds. As a general rule of thumb, don't put more than 5 per cent of your overall investments into any one fund or stock. £50,000 seems a reasonable maximum size for you due to your total portfolio size.

Overall, your investments have a balanced or medium risk profile. If you wish to reduce their risk as your pension income has decreased, you could increase your exposure to bonds, as property and infrastructure funds already account for about 20 per cent of your investments. This should help protect the overall capital value of your investments in a market downturn.

If you want to add some ethical funds, options include Threadneedle UK Social Bond (GB00BF233B38).

Thomas Dawson says:

Allocate, say, up to 5 per cent of your investments to a fund rather than having a monetary limit. And alter this for different types of investments. So, while maybe about 5 per cent of your investments in a large-cap equity or short-duration corporate bond fund would be appropriate, it would be more suitable to have only up to 2.5 per cent of your assets in funds that invest in unlisted assets due to their liquidity and pricing risks.

You probably have too much equity exposure and are overexposed to UK equities, but under-invested in US equities. However, as you do not want to draw from the Sipp its allocation could be slightly different to the other accounts, so you need to make a decision on this.  

Emerging markets and property seem suitable, if you access them via funds that take relatively conservative approaches. Options include JPMorgan Emerging Markets Investment Trust (JMG) and Standard Life Investments Property Income Trust (SLI).