‘We’re in our 50s – can we invest and live off our £2.5mn portfolio?’

Investing consistently from an early age can put you in the enviable position of not having to work for a living. But if you need your investments and savings to last you for decades, picking the right investment strategy and holdings becomes particularly important.

Mark and Hannah are 56 and 51 and have amassed a £2.5mn portfolio over years of saving and investing. Mark still works occasionally, and when he does he earns the equivalent of about £100,000 a year, but he prefers not to rely on it. “I base my financial planning on not working and view any earnings as a bonus or opportunity to add to our Isas or pensions,” he says.

The couple lives off their savings and investments, drawing about £60,000 a year. They keep a significant portion of their portfolio in cash, around £210,000 in total. “The cash accounts are returning more than 5 per cent on average and we are drawing down around £5,000 per month for living expenses, so our cash will expire in around three years,” Mark says. “Our Isas currently generate £33,000 in income per year, which we reinvest, but once our cash runs out we’ll start taking the Isa income plus some capital.”

Mark and Hannah’s financial position looks solid. Withdrawals of £60,000 a year only equate to 2.4 per cent of the portfolio, which looks achievable even accounting for inflation. But Mark still worries about picking the correct investment strategy. “Our investments are predominantly high-risk stocks, but I am happy with that as I have some safety nets such as the ability to work, cash savings and dividend income. I avoid bonds given their volatility over recent years and as cash is paying over 5 per cent with no capital risk,” he says. “I look holistically at our account holdings – for example since my wife is a bit younger than me, she holds most of our private equity assets in her pension.”

The couple invests predominantly in investment trusts, with a few funds, ETFs and single stocks, particularly UK income payers. Our portfolio clinics often encounter portfolios needing a big shake-up, but our analysts thought that, overall, Mark and Hannah are doing a very good job with theirs.

Still, the portfolio has 55 holdings, including various small ones that could be tidied up. “I have dabbled with individual shares with some success (and many disasters!), but find that the effort draws my attention away from our core investments, so I am scaling back,” says Mark. “Smoking killed both my and my wife’s fathers so I avoid tobacco companies where I can. As a result, I have several UK income-paying companies in my Isa as I can’t find a UK income fund that avoids tobacco.”

The couple also has a teenage son, with a Junior Sipp and a Junior Isa already set up for him. Mark makes the bulk of the investment decisions but has prepared a plan for Hannah in the event of his death, for moving all investments into low-cost global tracker funds.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS’ CIRCUMSTANCES

Ben Yearsley, investment director at Shore Financial Planning, says:

What you are doing is pretty sensible. Having about 10 per cent in direct shares, 80 per cent in funds and 10 per cent in cash seems like a good mix, especially if you are going to be living off your investment pot. You are right to be predominantly in stocks. You are in your 50s and will potentially be relying on this money for three or four decades, so the portfolio needs to keep growing to keep pace with inflation, which means allocating to real assets such as stocks, property and infrastructure.

When it comes to the individual shares, there is a big mismatch in position sizes, ranging from around £2,000 to £35,000 in Jet2 (JET2). With the best will in the world, will a £2,000 holding move the dial on a £2.5mn portfolio? I would look to consolidate the single-stock holdings to 10-15 in total, with a minimum of £10,000 per company. This will reduce the time it takes to monitor them and ensure you are focused on the highest-conviction ideas.

There are lots of funds and trusts I like in the portfolio. Polar Global Insurance has been a stalwart of mine for well over a decade and is uncorrelated to most other investments. I’m also a big fan of Fidelity European, Herald, NB Private Equity, F&C, Greencoat, TR Property… it’s a pretty good portfolio. But once again there is a big discrepancy in the holding weights, which range from 1 per cent of the portfolio up to 18 per cent. Some of it could be down to performance, but it does feel unbalanced from that perspective.

To draw down from the portfolio in the next few years, you will need a larger natural income element. It feels like a very growth-focused portfolio with only smaller elements of core or value areas. I understand your antipathy towards tobacco, but there are funds you can look at. How about Trojan Ethical Income (GB00BKTW4T37) for a non-tobacco investing income fund – it has an excellent team that focuses on quality companies. There is also a global version of this fund, Trojan Ethical Global Income (GB00BNR5HJ67). Another fund to look at to get more of a balanced portfolio is Schroder Global Sustainable Value Equity (GB00BF783V38) – the name says what it does, although it isn’t income-focused. I would look to add both at a 5 per cent weight each and fund them by taking money out of JPM Global Growth Income, L&G International Index and F&C, just because they are the largest holdings. 

You should consolidate some of the smaller holdings. Do you need four private equity trusts, especially when F&C also has a 10 per cent private equity exposure? The same applies to the two small European holdings – just hold Fidelity European rather than both.

Louis Coke, director of private clients at Charles Stanley, says:

Your total cash across all accounts is about £201,000, or 8 per cent of the portfolio. I would suggest this is too high, even at current deposit rates. You are fairly young and hopefully have a few decades of investing and spending ahead of you, so your real rate of compounding is crucial to make your funds last. Or, if you prefer holding cash, you could invest in low-coupon gilts, so that the returns are delivered as capital and likely exempt from capital gains tax, against potentially taxable interest income.

You must share many of my views, given that you have a strong preference for stocks and use investment trusts to your advantage. One area where we differ though is preference for dividends. Often it is assumed that taking an income from your investments means investing in dividend stocks. But I would favour investing on a total return basis. I would reduce the equity income investments and allocate more towards growth. If you are unsure, a halfway house might be something like M&G Global Dividend (GB00B39R2R32), which has a broader geographic focus and focuses on dividend growth over time, not just a high initial yield. 

You seem like experienced investors who know what assets you own and why, which can allow you to be comfortable with a more concentrated approach. As you rightly point out, you can still work, which gives you a little more ability to take investment risk. As you get older and become more sensitive to losses, there may be an argument to add diversification and perhaps other asset classes, but I would not see this as a priority for the short term.

But you should rethink the fairly large holding in F&C. This may be a good choice for smaller portfolios, but in this case the capital could be put to better use. Emerging markets might be a useful addition to the portfolio, for example via the Lazard Emerging Markets Fund (GB00B24F1P65) or the Templeton Emerging Markets Trust (TEM). Both are well-managed and have good track records.

I would also favour the addition of high-conviction developed market exposure, via the Metropolis Value Fund (GB00B3LDLX86) or the Ninety One Special Situations Fund (GB00B1XFJS91). History tells us that the majority of stock market returns tend to come from a small number of companies. Given Mark and Hannah’s portfolio size, investing experience and fairly low rate of withdrawals, a more concentrated approach could be good for them in order to maximise the long-term compounding potential of their asset base.

It is good to see an allocation to smaller companies among the mix of investments. The temptation for investors is to chase US large-cap stocks after a very good run, but I agree that smaller companies can deliver significant value over time. There may be merit in reviewing the choice of small-cap manager here – Henderson Smaller Companies has underperformed some peers such as Odyssean Investment Trust (OIT) and BlackRock Throgmorton Trust (THRG) over the past few years.

You should sell individual shareholdings worth less than £10,000, with the exception of BAE Systems (BA.). The shares are fairly fully valued at the moment but in the current environment, an allocation to the defence sector may be useful. I would also look to sell IAG, Tesco, Howdens and Barclays. I tend to prefer direct equity exposure only for high-conviction views.

I tend not to be a fan of the travel sector, but I would make an exception for the holding in Jet2. This is a well-run business and I take comfort in the founder Philip Meeson retaining a significant stake. As a guide to position sizing, I would look to reduce the shares if they became more than 2 per cent of the total asset base.