‘We’re retired with a joint income of £100,000 – should we diversify our portfolio?’
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Dear Victoria,
My wife (64) and I (60) are both retired, we own our home outright and one rental property that has no mortgage.
We both have a mix of defined benefit pension income, Sipp, Isa, shares and cash that we think are taxed efficiently and achieve a joint annual net income of £95,000 per annum until we reach our eighties.
The amount of cash we hold is currently high as we are working on a self-build project. Once that is complete, we will sell our current home and invest the remaining cash and shares in ISAs over time. Our current defined benefit pensions provide £22,745 (Malcolm) and £2,314 (Gillian) gross per annum. Each of these pensions increases annually.
Our strategy has been to focus on a diverse range of income trusts and a small number of value shares that, in the case of our Sipps, deliver dividends in excess of the amount we draw on an annual basis (we do not buy/sell investments often and are in for the long haul).
It is a similar strategy with our Isas, we only take the dividends as income.
Malcolm and Gillian
Dear Malcolm and Gillian,
It is wonderful to see that you both manage your finances so diligently and it is a testament to your hard work that you’re in such a strong position, ready to really make the most of your retirement with a high degree of financial freedom.
You’re clearly not the lazy types, still working hard on a self-build project, which sounds fascinating. But it’s good to hear you’ve also got plans to travel and hopefully you can squeeze in some time to relax too!
On that note, even though you like to keep busy, I’d hate for you both to spend your hard-earned pension years staring at an Excel spreadsheet.
Between the two of you, your portfolios have got tens of holdings of funds and stocks, so I think you’re right, rationalising that number would be a good place to start.
Many of them account for a very small percentage of the entire portfolio, which isn’t going to majorly move the dial when it comes to your overall return, nor generate meaningful dividends (since you’re seeking income).
Of course, diversification is sacrosanct when it comes to investing, but there is a risk of going too far, with “diworsification” diluting the impact of investments.
It’s up to you, but the funds team at Interactive Investor suggests that around 10-20 funds with about two thirds invested in core funds is a sensible approach for a DIY investor’s portfolio – enough to own a mixture of asset classes and investment regions.
Equally important when building a fund portfolio is to use the “core” and “satellite” approach to asset allocations, meaning your largest positions are in steady growers that hopefully won’t be too volatile and can give you access to key investment sectors.
While your smaller allocations are to funds in less mainstream sectors that offer greater return potential but could come with more volatility.
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I don’t think you need to worry too much that you’ve got around 30pc of your portfolios invested in four funds. Remember that’s vastly different to being invested in just four companies.
Funds provide you with built-in diversification, plus you’ve picked winners that suit your goals. M&G Global Dividend, your largest position, is up 61pc over five years compared to 52pc for the typical global equity income fund.
A yield of about 2.5pc is at the lower end of the yield spectrum for income stocks, but I think it is still a good core holding for you since you’re looking to continue investing over the long term as it provides growth as well as income by looking for companies that grow over time such as Microsoft or semiconductor firm Broadcom.
Plus after Meta’s recent surprise dividend, what’s not to say more tech companies won’t head in that direction. On the growth side, Invesco Global Equity, another one of your core holdings, has also been a very strong performer, gaining 77pc over five years, outperforming the typical global equity fund at 60pc.
One point of caution, be careful about overlaps between your three core dividend funds. Data from FE Analytics shows that they are quite correlated at 0.89 for Fidelity Global Dividend and BNY Mellon Global Income and 0.72 for M&G Global Dividend and Fidelity Global Dividend, meaning they own similar stocks so provide less diversification than you may think. Therefore, you might not need to hold all three.
Instead, I’d suggest adding a bond fund as a core holding as this will add asset class diversification as well as provide another source of income. This will also help to address your concern that you’re leaning too heavily towards equities.
The bond market is an attractive source of income now that interest rates have risen, and there is also the potential for capital gains as interest rates come down.
Take a look at Rathbone Ethical Bond, at 5pc from investment grade bonds, and for a more adventurous satellite holding, check out Royal London Global Bond Opportunities which yields 6.3pc, owning higher yielding but riskier bonds.
Good luck with the self-build project and I wish you both a brilliant, well-deserved retirement.
Victoria is head of investment at Interactive Investor. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.
