Should I increase my fixed-interest weighting?

"I plan to retire at 60 and then travel for a few years in comfort,” says Charles. “So I would like an income in retirement of about £40,000 a year.

Ideally, I will spend all my assets before I die. But of whatever is left over, 10 per cent will go to charities, and the rest to my sister and her two children.

"I have a self-invested personal pension (Sipp) worth about £1.3m with fixed protection at £1.25m, and an individual savings account (Isa) worth about £400,000. It seems more tax-efficient to draw down from my Isa first, so I may not need to draw from my Sipp during the first five years of retirement.

"Although I have always been comfortable with market fluctuations, as I have exceeded my pensions lifetime limit and will pay tax on any further increase in its value, there doesn’t seem much point in taking risk to generate a surplus.

To that end, I have recently invested in Capital Gearing Trust (CGT) and RIT Capital Partners (RCP) – wealth preservation funds. And I have reduced my holding in Scottish Mortgage Investment Trust (SMT).

"I also wonder if more exposure to fixed-interest securities would help to diversify and reduce the risk of my investments? If so, what bond funds should I consider? Gilts seem a bit dull and I am reluctant to hold a lot of cash, given the paltry rates.

"However, I thought I could take greater investment risk with my Isa. I do not have a target return, but I am still relatively young, so aspire to modest growth.

"I generally aim to have a diversified portfolio, and invest in exchange traded funds (ETFs) to reduce my cost of investing, as well as investment trusts. I do not invest directly in shares because I do not want to undertake the large amount of research this requires.

"I have increased my exposure to the UK because I thought the valuations of shares listed on this market were depressed by the Brexit process. But I fear I may now be overexposed to the home market.

"I have also been concerned that sterling might strengthen and return to levels of around $1.50, so I have switched some of my US exposure into a hedged fund – Xtrackers S&P 500 UCITS ETF (XDPG). I may do the same with the Japan ETF I hold, as this seems like a cheap way to hedge currency risk.

"My only Asia Pacific exposure is ETFs focused on Japan and other developed markets. I have not ventured into emerging markets or commodities funds, but I am open to doing this if it helps to diversify my portfolio.

"I thought that Tritax Big Box REIT (BBOX) would be a good way to invest in property without exposure to the decline of the high street. But I now wonder whether a broader-based commercial property fund would suit my objectives better."

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:

I’m intrigued by your concern that sterling might rise. From one perspective, your concern is justified: sterling is cheap if measured by the real exchange rate, and this has often led to it rising. But assets are often cheap for a good reason, in this case, because investors think that the UK has worse growth prospects than other countries, in part due to Brexit.

If they are right, sterling might stay cheap. But if they’re wrong and sterling rises, you could expect a similar uplift in the UK’s growth prospects to benefit domestic stocks. So you’d win on this count.

The circumstances in which sterling rises are likely to be ones in which investors’ appetite for risk increases because sterling is considered to be a risky currency. But in such circumstances equities would also generally rise. So I wouldn’t worry much about sterling rising. 

But reconsider your aversion to cash. Sure, returns on this asset are pathetic. But, as this year has reminded us, there are many things worse than a zero return, and cash is a good protector against many risks.

Keir Ashman, pensions and investments specialist at Bancroft Wealth, says:

You are in a strong capital position, but could benefit from some high-level tax, investment and income planning.

There are various methods via which you can reduce your tax liability. The lifetime allowance tax charge is reduced to 25 per cent if the surplus is taken as an income rather than a lump sum, assuming that you become a basic-rate taxpayer when you retire. This would result in a total 45 per cent tax liability as opposed to a 55 per cent one.

Also consider taking advantage of the recent market fall to crystallise your pension now as this could minimise or remove the penalty on the first assessment. You would then be unrestricted in your investment strategy as you could keep the value of your pension under the allowance limit by drawing the growth from it.

When you have maximised your pension allowances, consider using other tax wrappers such as venture capital trusts (VCTs). Due to their generous tax benefits you could reduce your income tax liability and receive tax-free dividends from them.

By reducing fees wherever possible you can maximise investment returns. You already make good use of low-cost trackers and ETFs, and are not paying a percentage platform charge. And if you engage a financial adviser to assist with the income, risk and tax planning outlined above, you could achieve significant savings by choosing one with a fixed fee rather than one where the fees are linked to the size of your portfolio.

As you want to use up your capital during your lifetime, we suggest using income modelling software to determine the investment return required to meet your income and capital needs in retirement. This would also help you to decide the appropriate level of risk to take in your investment portfolios. You could then structure your investments appropriately, taking a disciplined approach to asset allocation as this has a far greater impact on performance than market timing or stock selection.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You ask whether you are overexposed to the UK, with around four times as much invested in this market as a typical neutral investor.

UK stocks are cheap relative to global equity indices, having underperformed for years, which could justify being overweight in them. But UK equities seemed relatively cheap five years ago and since then have become cheaper. This highlights the fact that being cheap is not the only thing that matters. In particular, being overweight in the UK means having a particular sectoral skew. So your investments are likely to be overweight banks and miners, and underweight in manufacturers and big technology stocks relative to the world market. There are no UK counterparts to Apple (US:AAPL), Facebook (US:FB) or Google owner Alphabet (US:GOOGL), a big reason for the UK’s underperformance in recent years. With such tech stocks now more fully valued than before, I suspect that being overweight in the UK won’t be as expensive as it has been in the past. But it is still hard to justify.

However, I don’t think this warrants buying into emerging markets. These would be likely to outperform when the world economy recovers and appetite for risk increases. But this would only be a reward for their greater downside risks, such as heightened exposure to the possibility of financial crises. History tells us that a good way to play emerging markets is to use the 10-month rule, which involves buying when prices are above their 10-month average and selling when they are below it. This is because emerging markets, like most sentiment-driven assets, have more momentum than most. And this rule suggests staying out of emerging markets for now.

I am also not sure about commercial property. Falling demand for space by retailers is not the only problem – important as this is. If working from home proves to be sustainable, albeit a big if, demand for office space might also dwindle. And there’s the problem of liquidity risk as, even in good times, commercial property is hard to sell. This means that investors in open-ended property funds risk not being able to withdraw their money from them if they experience too great a level of redemptions. And investors who want to sell their shares in commercial property investment trusts might have to do it at a big discount to net asset value. So I don’t hold commercial property funds.

Keir Ashman says:

You are right to be concerned about your low allocation to fixed-interest. An aim of modest growth and desire for less investment risk suggests an allocation to fixed-interest of 25-30 per cent.

It would also be sensible to include property as part of the diversification strategy. Tritax Big Box REIT is a logical choice if you wish to minimise exposure to the high street. However, you could hedge your bets by adding a broader commercial property fund, as trusts such as BMO Commercial Property Trust (BCPT) at time of writing are trading at less than half their value compared with a year ago.

Rob Morgan, pensions and investments analyst at Charles Stanley, says:

It makes sense to take a consolidation approach within the Sipp, although the Lifetime Allowance charge only kicks in when one or more benefit crystallisation events take its value over the fixed protection allowance level. Broadly, a balanced, diversified approach is likely to suffice, so you could take a more adventurous stance with the Isa if required.

Your UK exposure doesn’t seem unreasonably high in what is a straightforward and easy-to-monitor portfolio.

Tritax Big Box REIT has been relatively insulated from the wider malaise in the UK commercial property market, so I wouldn’t be in a hurry to add a more generalist commercial property trust. Many trusts have suspended or reduced dividend income, a significant part of their returns. But many specialist property funds that invest in areas such as warehousing or healthcare have been more resilient – despite being less diversified. So property could be an area where a focus on defensive attributes remains important.

An alternative way to diversify could be to invest in a large infrastructure investment trust such as HICL Infrastructure (HICL) or International Public Partnerships (INPP).

As you have experienced the tailwind of a falling pound it is understandable that you want to lock in some of that gain. But although when investing in Japan it has often made sense to hedge currency due to the volatile nature of the yen, that has reduced in recent years, so I wouldn’t get too hung up on whether to hedge. Central banks seem to be playing the same devaluation game, so predictions are tricky.

Your investments' exposure to fixed interest is fairly small and limited to shorter-dated investment-grade debt, so there’s some scope for diversification. Shorter-dated debt is generally less sensitive to changes in inflation expectations and interest rates than longer-dated bonds, but the yields it offers may be lower. So it can be suitable for investors looking to reduce their investments' sensitivity to interest rate movements that particularly affect longer-dated bonds.

However, it would have limited scope for gains if interest rates go even lower. So there’s no right or wrong answer to this, but one solution would be to invest in some actively managed, more flexible funds, whose managers can position them and adjust their duration according to where they see opportunities. Options include Janus Henderson Strategic Bond Fund (GB0007502080).

There’s quite a strong correlation between most Asia Pacific and emerging market funds, so historically having both hasn’t provided as much diversification as you might think. However, this historic correlation may break down, and I suspect that the relative fortunes of nations across Asia will diverge. The Asia ETF you hold only provides meaningful exposure to Australia, South Korea and Hong Kong, so a broader fund might better capitalise on the opportunities in the region. An emerging market ETF, for instance, would have hefty weightings to China, India and Taiwan, which have significant long-term potential.

You already have a fair slug of exposure to commodities via the mining and energy parts of the UK market.