Dear Investor,

From the Investors Chronicle:

Our reader needs to diversify his portfolio to achieve his target of £250,000 over the next 11 years.

Our reader is 44 years old and has been investing for four years. He is aiming to build up around £250,000 by the age of 55 to supplement his civil service pension, which will be reduced significantly if he retires at 55. He would like his portfolio to generate an income of around £10,000 a year via dividends and capital appreciation (accessed via capital withdrawal).

“My wife and I have £1,000 a month to invest towards this, which will double to £2,000 a month for the last two years once our mortgage is repaid,” he says. “We are tied into our mortgage for the next four years at 4.99 per cent which carries a hefty penalty for switching.

“We do not have any children. We would like to retire early, ideally without downsizing our home, although we could downsize and release around £100,000 for our retirement pot if it made the difference between retiring early or not.

“We both work full-time and our earnings are our only source of income. We have no cash or other investments other than the equity in our home. We don’t save cash because interest rates hardly protect its value over time. We are both civil servants so wouldn’t lose our income overnight in situations such as bad health. We budget well and if we have unforeseen expenditure we put it on our credit card and pay it off the next month, when we save less.

“I am open to risk as I am 10-plus years away from needing my income or capital – the reason why my portfolio includes risky growth stocks. Most of my portfolio is sitting at a loss, which doesn’t worry me too much in the short term. I am sat on a paper loss since I started trading: past profits and losses, plus my current portfolio loss, equal a loss of around £7,000 to date.


I expect my attitude to risk to change as I turn 50 and get closer to retirement. At this point I will be looking to safer shares and dividend income, with less focus on capital growth. At the moment dividend income is not important, although I reinvest in more shares where I can, as I appreciate the power of compounding.

“My first trade was buying Barclays (BARC) shares over the months of the financial crisis on the basis that they were too big to fail – and we all need banks. Every time they went down I bought some more, thinking it was the obvious thing to do. I invested around £5,000 and sold them for around £9,000. This led me to think that I had found my true vocation in life, so my philosophy became looking at five-year charts and buying big companies that appeared to have gone down substantially.

“I now realise, having since bought the likes of Debenhams (DEB) and Premier Foods (PFD), that it’s not as simple as that, and that I was lucky with Barclays. I now read and think a lot more before making a trade.

“My last three trades were buying another 500 Poundland (PLND) shares at £2.16 because they tanked due to the 99p Stores not being ready for Christmas, which is surely a short-term issue. And every time I pass my local Poundland there’s a big queue!

“I bought another 350 Rolls-Royce (RR.) shares at £5.49 on the news that an activist investor had upped its stake. And I sold 200 GlaxoSmithKline(GSK) shares at £14.01 on the news that Hillary Clinton might impose price caps, and after reading that too many protected lines are soon to open up to generic competition. I have the following shares on my watchlist:

Fevertree Drinks (FEVR)

HomeServe (HSV)

Dunelm (DNLM)

Lloyds Banking (LLOY)

Rentokil Initial (RTO)


The letter was not addressed to me, but let me try to voice an opinion on his situation:

Dear Investor,

Firstly, let me commend you on your aim to supplement your pension by investing in the market. Not only is it prudent, it might also be necessary. Having said that, I think you should aim much higher than £250 000 for a comfortable retirement.

You mentioned having a mortgage at 4.99% with a heavy penalty for switching. For others who are able to switch, even though it is a hassle to re-mortgage, make a habit to be aware of the best offers out there. Switching every two years is not excessive.

Secondly, let’s look at your portfolio. I agree that you were lucky with Barclays. Having looked at Aggreko and Premier Foods extensively in the past, these are companies that require research and monitoring. Stocks that have really high volatility and project-dependent income are not good picks for an investing situation such as yours. I would suggest lightening up on mining companies too.

Thirdly, let’s look at your asset allocation. I’ve often harped on diversification and taken for granted that people understand what diversification is. I will not attempt to explain it here in a paragraph. Suffice to say that the number of holdings you have is not enough, you haven’t diversified and this is not an example of good risk management.

(You did speak of being open to risk, including risky growth stocks. However, I am not fully convinced that many investors, especially when they’re just beginning, understand how to manage risks in the portfolio.)

Fourthly, I think there is a need to differentiate between the terms investors and investing. A lot of advice on the internet are for those who are interested in converting the cash they have in the bank into equities or other forms to earn a higher return than the bank’s savings rate. I think the approach for those who invest for a living and those who I described above should be different.

For you, I would recommend to begin afresh, change your approach, buy several funds, and keep the cost of running them low. This will provide the diversification you need for the bulk of your money. If you have strong views on single companies then go ahead and put a few percent each there on top of that. When you do, I would suggest getting many different themes into the portfolio, almost half the names you have are exposed to unpredictable commodity markets.

(I read Chris Dillow’s advice to this reader on momentum. It is a huge stretch to expect an individual who is unfamiliar with correlation to be able to build a diversified portfolio, let alone monitor momentum.)

Fifth, tax is an important consideration. On top of ISA and pension contributions with your time horizon and higher risk tolerance, you could consider VC trusts or even more adventurous EIS that get you a tax refund.

I hope I haven’t offended you with my blunt opinions, dear investor. Good luck.


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