The Daily Telegraph - Saturday - Money
Money Makeover ‘Is my portfolio too racy or on the right track?’
Our car-racing reader needs to change his pension and Isa to afford his favoured luxuries, says Jonathan Jones
Many of us worry about funding retirement. Pensioners need to balance the lack of a dependable monthly salary with a desire to fill free time. Add in inheritance and care costs and each pound is split several ways.
But Malcolm Ash, a 70-year-old from Shropshire, has earmarked his savings for the finer things in life. The retired university lecturer has an employer’s pension that pays £18,000 a year. This, alongside an £8,000 state pension and £8,000 in rental income, means he and his wife have enough to live on.
Then there is £ 113,000 in a personal pension, but half of it is sitting in cash for fear of falling stock markets. Another £ 27,000 is invested via a stocks and shares Isa. These, he said, are to fund his desired luxuries such as international travel. First up, when rules allow, is Japan. “I’ve been to Shanghai many times and worked in Kuala Lumpur but I never got to Tokyo,” he said. “We have no children so my wife and I want to spend our money on trips before we croak.”
However, spending £10,000 a year on holidays, as he expects, will soon eat into their savings. He also wants to keep some cash back to cover care costs, so has taken to investing. “I hadn’t invested until I retired, but I taught statistics so I knew w compound interest would work against ainst me if I didn’t,” he said. “I have done one OK but that’s because there has been een a strong market rather than my y skill.”
Mr Ash wants to focus us on growing his personal pension by 8pc a year. It is a tall all order considering 45pc is held in cash and the rest t is spread across 33 funds. He wishes to leave his Isa as it is. It has 22 funds working towards beating inflation, with high-risk choices.
Mr Ash acknowledges s this and is concerned that at his strategy is not up to o scratch. He wants to know how he can fund his travels and future care costs while he enjoys his hobbies.
These include racing Caterham cars – which costs around £5,000 a year.
Malcolm Ash says he needs £10,000 a year to fund travel plans with his wife
Associate investment director at Killik & Co, the wealth manager: We all know diversifying investments across different companies, types of asset and regions is a great way to reduce risk. However, there is also such a thing as over- diversification. If Mr Ash wants to achieve 8pc a year, he will need a smaller number of investments than 33 funds. This is because the more funds, and therefore stocks, you have, the less impact a single investment has on the portfolio. One of Mr Ash’s funds could rise by 50pc but his overall portfolio would barely move. He essentially has a very expensive tracker fund.
The long- term return of the stock market is just over 5pc a year above inflation. Beating this will require emphasis on higher-growth areas of the market so it is up to Mr Ash to decide if he is comfortable taking that risk. Areas such as artificial intelligence, renewable power and Asian stocks provide this sort of growth, and he already has such funds in his portfolio, but he needs more money in them.
He should dramatically reduce the number of funds, some of which account for less than 0.5pc of his portfolio. If he does not have enough conviction to put more money into them, are they worth owning in the first place?
An 8pc retur return will require a high level of risk, b but he should not take such risk wit with the Isa, as his aim is to match infl inflation. The Isa has significant exposure to emerging mark market stocks and smaller com companies, but he should foc focus on less volatile in investments. His holding in the Capital Gearing Trust is one that could be added to. It has a fantastic record of preserving capital. He should also consider adding other a alternative assets such a as 3i Infrastructure.
Keri Carter
Managing director of Broadway Financial Planning: It is great that Mr Ash’s income covers his normal expenditure and he can channel his investment returns into fun stuff. However, I question whether his expectation of 8pc is realistic based on his balanced-risk portfolio with some 45pc in cash.
His pension is based on a mixture of cash and active global stock market funds. This approach will see virtually no return on the cash and his funds carry a relatively high cost. Both will hit his returns.
A return of 6.5pc a year, before charges, is more realistic and can be boosted by lowering his costs.
He could opt for a single multi-asset fund that invests in stocks and bonds and matches his desired risk. Given that Mr Ash wants to travel, he should question whether he will have the time and energy to manage such a large and complex portfolio. A low-fee provider such as Vanguard would provide him with a diversified portfolio that will look after itself and provide market returns over the long term.
It is understandable to be nervous in the present market, so holding so much cash may seem sensible, but there is much to be said for the adage “time in the market will outweigh timing the market”. Being invested should improve the chances of achieving growth in excess of cash returns, and if he wants 8pc he needs to get on and do it.
Research suggests that over the long term it is better to invest spare cash in one go rather than over a number of months. This is because the sweet spot of phasing takes between 24 and 36 months. However, this comes with risks and by phasing investment over, say, five months at £10,000 a month he would avoid anchoring to one point of entry.
When deciding which way to proceed, Mr Ash should consider which would disappoint him more: that his money could go down overnight or that he might miss out on sizeable gains.