Creating a strategy that can adapt to different circumstances, while still making the most of your investments can be tricky. David, 70, has gone about it by keeping quite a substantial amount of cash, but he risks missing out on returns if he doesn’t decide how to deploy it soon.

He and his wife Susan, also 70, receive the full state pension and about £20,000 in dividends from David’s business. The two own their £1.7mn home mortgage-free and have about £740,000-worth of assets on top of that via a mix of cash, bonds and stocks in their pensions and Isas.

“I am semi-retired but run my import and distribution business part-time. We want to live comfortably and travel a little,” says David. “For now, we don’t need to draw money from our savings and investments. We probably will in the future, but I don’t know how much we’ll need.” The extra income could come in handy if David were to exit his business, in order to travel more or for care costs in later years, for example.

But this lack of target has meant David holds a sizable sum of cash in his portfolio. “I have a fair amount of money in instant savings accounts because I wanted to remain flexible, for example in case I decide to invest in a property. Flexibility is the key for me,” he says. Cash and bonds account for some 73 per cent of his assets, including the cash held in his pension, which is worth 24 per cent of his retirement savings.

David has the pension and individual savings account (Isa) investments himself and is ready to tolerate losses of about 13-15 per cent. The accounts are invested in a mix of single-company stocks, investment trusts and funds. He doesn’t have any specific goal in mind and is not sure about the rate of return he could hope for. “I wish I knew enough to be able to put a figure on it,” he adds.

But the portfolios, certainly the pension, have a lot of holdings and of varying sizes. Alongside the huge cash buffer, a further 38 holdings only account for 32 per cent of the pension. His largest investment is £13,500 in RIT Capital Partners (RCP), which is only 5.7 per cent of the pension. “I like doing my own investments and work on tips and hunches. For example, I invested a little in DS Smith (SMDS) and Smurfit Kappa (SKG) during lockdown due to the increase in online sales and subsequent cardboard shortage; I invested in AJ Bell (AJB) and AssetCo (ASTO) because I know one of their large current investors,” David says.

“Of course, they don’t all work out well. Some of my stocks have disappointed recently, but I suppose that is to be expected. The environment looks difficult at the moment but I think I need to be patient and sit this one out,” he adds.

David is wondering how to improve his portfolio, making sure he has the right mix of assets and level of diversification while staying flexible so he can be ready for whatever the future holds.

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

Max Newman, equity specialist at Atomos, says:

Your strategy is clearly conservative. With UK interest rates now at levels not seen for over 15 years, savings rates do look attractive, but I would urge caution over ramping up cash at the expense of investing.

I do have some sympathy with the tactical use of cash over the course of a market cycle. But like with all portfolio hedges, you must remember to take it off; and the odds of getting both the timing and the investment selection right are thin. The ‘optionality’ that cash can bring to a portfolio has some value, but I think it is generally misunderstood just how expensive it is.

Suppose you can even achieve a 5 per cent rate (and your instant-access accounts, cash Isas and cash in the pension will yield less than this), you are effectively locking in a negative real return, with inflation in the UK still stubbornly high at an annual rate of 6.7 per cent in September. This may well decelerate in the months to come, but there is usually a positive correlation between inflation and interest rates, so the actual annualised return on cash in this scenario would most likely be lower. The bond market is pricing in that we are at peak rates in the UK and cuts from the Bank of England can be expected from the middle of next year.

Instead, I would increase your exposure to bonds. The opportunity set has much improved now that government bond yields have risen to levels not seen since 2007, and your portfolio would benefit from a decline in yields, for example in the event of a deterioration of the economy.

Bonds would add resilience to your strategy, which could potentially suffer equity falls on one side and lower returns from cash savings on the other. At the very least you should deploy the excess cash in your pension in this way. Outside the pension, you could invest in UK gilts, which can be bought at a discount to par, with annualised yields of over 5 per cent. They would also be exempt from capital gains tax and still provide flexibility should you wish to purchase a property.

There are a very large number of holdings of minimal value in your pension and Isa. It can be difficult to stay on top of them and really know your underlying exposures. You could easily halve the number of investments and understand them more intimately.

The holdings are also heavily biased towards the UK, particularly smaller companies, where performance has been challenging. While UK valuations look cheap, investors need to adjust for a combination of weaker growth prospects and structural ‘scarring’ as institutional investors and companies have moved away from the UK market. Sadly, it is now a much smaller, specialist market and is perhaps best served through active managers who can take advantage of this valuation ‘arbitrage.’ You should increase your holdings in BlackRock UK Smaller Companies (BRSC) for this purpose.

Finally, consider diversifying towards global equity markets to really tap into the long-term growth potential beyond the shores of the UK and gain exposure to selective growth opportunities such as artificial intelligence (AI). We like Veritas Global Focus (IE0034106280), Jupiter Global Value Equity (GB00BF5DS374) and Brown Advisory Global Leaders (IE00BYPJ0V09) for a high-conviction approach to global stocks.

Hats off to you for owning Nvidia (US:NVDA) – hopefully you are sitting on large gains. While Nvidia hardware has been foundational to AI, there are other companies that will be the ultimate long-term beneficiaries of public cloud adoption and the monetisation of AI tools, most notably Amazon (US:AMZN), Microsoft (US:MSFT) and Alphabet (US:GOOGL). In contrast to Nvidia, I think investors are yet to fully appreciate the long-term profit opportunity for these established global tech players, which offer comparably lower risk.

 

Poppy Fox, investment manager at Quilter Cheviot, says:

You should consider making your pension more balanced and diversified. Your risk appetite does not necessarily fit with your holdings. You have circa 76 per cent in stocks and 24 per cent in cash, but you may wish to consider reducing your equity exposure to match your capacity for loss of up to 15 per cent.

You could sell some of the most volatile assets and use some of the cash to invest in bonds and alternative investments. There are plenty of opportunities in the gilt and corporate bond space in the current environment. You could buy some short-dated gilts, which would be low-risk while providing around a 5 per cent yield. The Royal London Short Term Money Market Fund (GB00B8XYYQ86) is a way to gain exposure to some ‘cash plus’ type of holdings, for example.

It is very difficult to predict what returns you might see from the portfolio, but I would expect an average of somewhere between 5 per cent and 8 per cent per year over the long term.

You have 50 holdings in your pension, which is quite a high number for a self-run portfolio. I don’t think this is an issue if you have the time and enjoy looking at the portfolio, but keeping tabs on all these holdings is a time-consuming task. Additionally, Thungela Resources (TGA) and Scottish Mortgage (SMT) make up more than 3 per cent and have recently been quite volatile, which is something to keep an eye on.

You do have a lot of cash, but I think this is an appropriate level until you decide what to do about the property investment. When looking to invest we would always suggest being able to commit for more than five years. But if you decide not to go ahead with the property investment, you should review your cash levels to ensure the assets are working as hard as they can. In the meantime, also check the interest rates on your current cash accounts to make sure you are getting the best you can.

Finally, if you are thinking of buying a second property purely as an investment play as opposed to a second home or a holiday home, do take the tax implications, logistics and lack of liquidity into account. Investing in physical property isn’t quite as straightforward as it was a few years ago.