‘Do Scottish Mortgage and Smithson belong in my £360,000 retirement fund?’
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Dear Victoria,
I am 62 and live with my partner. We have no mortgage.
My investment goals for my Isa are to generate cash to withdraw while preserving capital value.
Could you asses my portfolio on this basis?
Regards,
Ashley
Victoria says:
Dear Ashley,
For your stage of life, mortgage-free at 62 and hopefully with a long and happy retirement ahead, I think your goals should focus on generating income and preserving capital during your pension years.
At the moment your portfolio is very much geared towards growth, with heavy exposure to shares and a lack of the dividends and bonds that generate the kind of yields required to achieve greater security and income in retirement.
Some of your fund holdings, such as Scottish Mortgage (16pc), Smithson (8pc), L&G Global Technology Index (6pc), Edinburgh Worldwide (4.5pc) and Baillie Gifford Shin Nippon (3pc), are not for the faint-hearted – they are trying to grow capital, there’s not much income and they come with the risk of significant volatility.
That doesn’t exactly go with what you’re after now – quite the opposite in fact.
Scottish Mortgage aims to find leading innovators globally, including private companies, but takes a lot of risk to find the next Amazon or Tesla (both of which it still owns). This would be an obvious fund to sell to de-risk the portfolio.
Smithson could also be reconsidered, as its strategy of finding smaller companies from around the world has fallen flat. The investment trust is 31pc off its highs and Scottish Mortgage is about 50pc below its highs.
Edinburgh Worldwide, which is run by the same fund group as Scottish Mortgage, is even riskier as it buys small companies that are also innovators. Rising interest rates have hammered valuations of this type of stock and the trust’s shares are 65pc below their 2021 peak.
Once you’ve reduced your exposure to growth, have a think about investing the proceeds in more suitable defensive income funds instead. City of London is one of our favourite UK equity income options. It is already one of your holdings, but you might think about buying more.
While British stocks have underperformed their counterparts in the United States and mainland Europe in recent years, the London market retains its allure for income seekers such as yourself, as domestic stocks can be an attractive source of dividends.
City of London has an impressive inflation-topping yield of 5pc, and I’m hopeful that it is here to stay given that the trust has raised its payout for more than 50 consecutive years.
For geographical diversification via international dividend stocks, take a look at the Fidelity Global Dividend fund and the Vanguard FTSE All-World High Dividend Yield ETF, both of which feature on our “Super 60” fund list and own international shares with higher-than-average dividend yields.
I’d think about adding bonds to your portfolio too. They would help to generate income in retirement and can be a great way to reduce risk and diversify beyond shares.
Bond yields have followed interest rates higher and you can now get about 4pc from gilts (British government bonds) and about 5.5pc from investment-grade corporate bonds.
Bonds should also act as a natural balance to your stock market exposure. They should rise in value if the economy and stock markets wobble, and if investors rush towards safe havens. Look at the Vanguard Global Bond Index Hedged, Jupiter Strategic Bond and Rathbone Ethical Bond funds as core ideas.
I notice you’ve got some tiny holdings in Tesco, Standard Chartered, Aviva, Barclays and Macau Property Opportunities. Each accounts for less than 0.5pc of your portfolio, which is too small to move the needle. Incidentally, all of these holdings have made quite painful losses.
Have a think about whether you want to let them go to cut your losses and simplify your portfolio. If there are any you feel particularly strongly about, perhaps think about increasing your exposure to a more meaningful level.
At the moment you’re taking a lot of risk and not generating the income you want. Finding better yields through dividend funds and the bond market will help to de-risk your portfolio and generate cash to withdraw so you can enjoy your well-earned retirement.
Best of luck!
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. You can see her previous columns here
