Consider your wealth over a 20 to 30-year time horizon

“I would like to retire on an income of around £25,000-£30,000 a year, but I am very cautious about quitting my job in the current economic situation,” says Jacquie. “I have a defined-benefit (DB) pension with a former employer that should pay out £9,000 a year, or £5,000 a year plus a tax-free sum of £45,000. The value of the annual income increases by £1,000 for each year I leave it. However, I do not have much confidence in the company that offers the scheme so I think I might be better taking it sooner rather than later.

"I have accrued about another £4,000 of pension savings in my current employer’s scheme. And any excess salary goes into an instant-access savings account, currently worth £55,000.

I will start to receive my state pension in two years, so if I retire before then I will initially need more income from other sources. 

"I have about £140,000 in an individual savings account (Isa) and £180,000 in a self-invested personal pension (Sipp), although the value of these has fluctuated. During the market turbulence earlier this year I realised that I wanted to sleep at night, so I switched investments worth about £200,000 into cash. But I think I sold some investments, such as Scottish Mortgage Investment Trust (SMT), too soon.

So my two main dilemmas are what to do with the £200,000 cash in my Sipp and Isa, and how to take my DB pension.

"Prior to going on furlough I invested via my investment platform’s managed portfolio service as I worked long hours. I didn't check my investments much, although had always thought that my money could be doing more for me – especially in view of the charges for the multi-manager funds and managed portfolio service.

"Since I have had more time on my hands I have been managing my investments myself, although have been investing for 20 years.

"I do not wish the value of my investments to fall by more than 10 per cent in any given year. And I want the remainder of my assets to be in something more predictable. But I don’t know much about bonds and, in view of their returns, wonder whether it would be better to invest in higher risk, potentially higher return investments? I thought of increasing my allocation to investment trusts that pay dividends.

"I am trying to be more scientific about the way I invest, though over the past few months I have been guided by global market situations rather than drilling down to company levels. This interests me and finer details confuse me – I look more at charts more than ratios as I don't understand them.

"More recently I have been learning about exchange traded funds (ETFs) as I am much more focused on lower-cost investments. For example, I have recently invested in iShares Global Water UCITS ETF (IH2O), Vanguard FTSE 250 UCITS ETF (VMID) and iShares S&P 500 Information Technology Sector UCITS ETF (IITU).

When choosing funds to invest in, I am guided by ratings provided by research company Morningstar.

"I realise that some of my funds hold the same companies as each other, but feel safer spreading the risk rather than holding just one. This has been a good thing because I hold European Opportunities Trust (JEO) and, at one point, its share price fell 11 per cent due to a substantial holding in Wirecard (GER:WDIX) [which became insolvent in June].

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:

Your dilemma – how to achieve your target level of income when you are reluctant to take risk – is an issue for many investors. If your roughly £300,000 were fully invested in equities and you had average luck, you could just about achieve your objective. It is plausible that long-run total returns on equities after inflation will average more than 4 per cent. Their average dividend yield alone is more than that and, after some near-term cuts, dividends should grow over time as the economy expands. This should allow you to take £12,000 a year from your investments while leaving their capital value more or less intact. Add this to your state and DB pensions, and you should have £25,000-£30,000 a year, depending on how you draw the latter.

But the fact that you switched £200,000 out of investments into cash earlier this year suggests that you don’t want to take on much equity risk. Ultimately, this is a matter of personal preference – it’s not about being right or wrong.

However, the dividend yield on the FTSE All-Share index is now well above its long-term average, even if you factor in likely cuts in payouts over the next few months. For the past 30 years, yield has been a great predictor of longer-term returns. This suggests that investors now will be well rewarded for taking on equity risk.

However, the pandemic might have broken the longstanding link between the yield and subsequent returns, and much depends on its course. If we get a second wave of Covid-19, equities will fall, but if we get an effective vaccine they will rise.

You also have some safe assets. Your DB and state pensions are, in effect, like income from a bond. With such a large holding in safe assets, you might be able to have a bigger allocation to equity investments because losses on shares won’t mean one-for-one losses of total income.

And you have margins of adjustment to respond to losses. You could maintain your spending and see your wealth fall if you are not leaving a bequest. And you could work for a bit longer to top up your savings, using your salary as a hedge against falling share prices.

So you might be in a better position to take equity risk than you think.

George Steger, senior wealth manager at Investment Quorum, says:

Maximising your guaranteed DB income appears sensible. You already have cash in hand, and the lump sum you would get for the income you give up is not particularly attractive. Your DB pension at the maximum annual rate and your state pension should provide you with around £18,000 a year, so would go a long way towards meeting your desired income level.

We believe that a drawdown rate of around £12,000 a year, to take your total annual income to £30,000, from your remaining assets should be sustainable over the long term. If you do this, hold around £36,000 – three years' income from your investments – in cash so that you do not have to draw from your investments during market volatility to cover your expenditure.

As you do not have any dependents you could also draw on your capital before your state pension starts to pay out.

I appreciate your downside concerns and need to sleep at night, but your cash allocation is very high. As you wish to retire, consider your wealth over a 20 to 30-year time horizon rather than the next year or two. If you maintain a high cash position, falls in the value of your investments will affect a smaller proportion of your overall wealth. However, doing this would also subdue the relative gains you could make and expose you to long-term inflation risk. For example, over 20 years 2 per cent inflation reduces the real value of £250,000 to around £168,000. You could invest some cash in inflation-linked bonds to help counteract this via SPDR Bloomberg Barclays U.S. TIPS UCITS ETF (UTIP).

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Think more about reducing the costs of investing. ETFs can play a big role in this – think of them as funds of equity funds because a global index tracker is, in effect, the average of all world equity funds. Such a fund should be your core holding instead of ones with higher charges.

But I appreciate that many investors wouldn’t want such a basic portfolio. So if you want to have other holdings remember that only two stockpicking strategies have proven track records: defensives and momentum. Several of your funds, including Finsbury Growth & Income Trust (FGT) and City of London Investment Trust (CTY), hold the former. Try to at least avoid negative momentum, meanwhile, by cutting losing funds.

George Steger says:

Your investments have exposure to exciting themes. Big tech, cloud, healthcare, biotech, digitalisation, cybersecurity, automation and clean energy have been well covered over the past four to five months and you have adopted some of them since March. Your current positions, for the most part, have performed well as the market has recovered since March.

These sorts of themes give your investments exposure to the companies of tomorrow’s world and potential for great growth. You could increase your exposure to them with L&G Cyber Security UCITS ETF (ISPY), which looks to track the performance of a basket of companies that engage in cybersecurity business activities.  

But I question your holding in Xtrackers FTSE Developed Europe Real Estate UCITS ETF (XDER). The rise in working from home and the accelerated adoption of online shopping due to lockdowns have put severe pressure on parts of the real estate sector. So this may be a holding for which the potential upside doesn’t justify the downside risks.

I would suggest replacing European Opportunities Trust, whose reputation has been hit because it held Wirecard for a long time. You could replace it with LF Miton European Opportunities (GB00BZ2K2M84), which is managed by Carlos Moreno and Thomas Brown who focus on quality growth stocks and have a great track record.

About 25 per cent of your investments have exposure to the UK, which is quite high, especially as Brexit uncertainty rumbles on. And you can find more exciting investment opportunities if you look globally.

We like the long-term potential of Asia, to which you could increase your investments' exposure as it is low. You could add Fidelity Asia Pacific Opportunities (GB00BQ1SWL90) whose manager, Anthony Srom, picks investments on the basis of their own merits, and takes a high conviction, style-agnostic approach. He takes contrarian and value positions, which can mean that the fund holds some less common stocks, so would complement your existing exposures. A weakening US dollar might also benefit companies in Asia.

With bond yields so low, equities appear more attractive for an investor with a reasonable timeframe. However, if you want to provide greater balance and diversity, consider SPDR Bloomberg Barclays Global Aggregate Bond UCITS ETF (GLBL), which provides exposure to various bond types and regions.