‘What should my Isa hold to fund my travels?’

Whether it's seeing the world or pursuing one's passions, retirement can offer many of us the chance to get the most out of life. But some will rightly question whether they are also getting the most out of their portfolios to help fund such ambitions.

Having been retired for eight years, Bill has been having thoughts about his own investments. Aged 67, he receives some £48,000 a year from defined-benefit pensions, with his 66-year-old wife Emily getting £27,000 a year by the same means. They are also eligible for the state pension and own their home, valued at roughly £550,000, outright.

This puts the couple in a strong position, as does the fact that they have investments at work, too. Bill has roughly £215,000 in an individual savings account (Isa), spread across four funds and 18 company shares. Emily has a much smaller Isa, with £33,000 invested across three stocks and the Rathbone Global Opportunities fund (GB00B7FQLN12). They also have £35,000 in cash.

Bill and Emily have a clear idea about how to use their money. “We aim to maximise our income and use it to travel extensively but not extravagantly. We also want to be able to treat the children and grandchildren whenever they visit,” says Bill. He is not concerned about leaving assets behind for the family, noting: “We have told the children if there is more than 10p in the account at the end we have not lived wisely.”

If Bill knows his mind when it comes to the recipe for a happy retirement, he is less certain when it comes to the best investment strategy. This is perhaps reflected in the make-up of the portfolios: as the table below shows, his main Isa has an explicit focus on income generation, with high yields across the board. By contrast, Emily's Isa, invested in Rathbone Global Opportunities, Abrdn (ABDN), Lloyds (LLOY) and XP Power (XPP), targets growth.

When asked about his investment style, Bill says: "My wife says I have none", noting that his only real focus has been on maximising income. This is the crux of the issue, with him conceding that he is unsure what investments to pick now. 

"I’m concerned I’ve painted myself into a corner and need to stand back. I have an inkling I need to diversify, but I'm not sure where to go from here," he says.

Like many, Bill has seen his appetite for risk falter somewhat as a result of past losses. "I invested £10,000 in Martin Sorrell's S4 Capital (SFOR) and it's now worth only £700. Hey ho, it might come back," he says. "I'm happy to take the odd punt like this but would not take another until I’ve recouped the £10,000 via other shares in the Isa."

Bill recently exited a £10,000 position in BP (BP.) as he concluded the company was “not going anywhere”, reinvesting this amount into the BlackRock World Energy Fund (LU0122376428) as a less volatile option that can still produce income. He also bought into British Land (BLND) for its income and growth potential and has generally backed some high-yielding funds.

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

Thomas Hinds, investment manager at Magnus Financial Discretionary Management, says:

Currently, you have two investment strategies: your Isa is focused on income but contains a few speculative growth stocks, whereas your wife’s Isa is invested for growth but contains some high-yield stocks. Your Isa is diversified across several different sectors, including energy, real estate housebuilders and financials. This reduces the overall risk by not being overly exposed to a single sector’s volatility.

You have selected some excellent income funds. Artemis High Income (GB00B2PLJN71) and Schroder Income Maximiser (GB00BDD2F083) are well regarded and will provide a steady cash flow. Your investment in The Renewables Infrastructure Group (TRIG) reflects a forward-thinking approach and aligns well with the global trend towards sustainability and renewable energy. 

However, there are several duplications that need addressing. Shell is currently one of your largest individual holdings. It is also the biggest holding in the BlackRock World Energy fund and a big position in Schroder Income Maximiser.

The same is true for others, including British American Tobacco (BATS), British Land and Aviva (AV.). I would suggest reducing some of these duplicate holdings and reallocating to another income-focused fund that complements rather than duplicates. We like the Artemis Income fund (GB00B2PLJJ36). It is a core holding in our funds, and the manager's focus is mainly on large caps. However, there are diverse sources of income. The fund has delivered good returns over several years with lower volatility than many of its peers.

I would sell stocks where you have only allocated a smaller amount of capital, such as Mitchells & Butlers (MAB), Unilever (ULVR) and Abrdn (ABDN) as they have negligible impact on the overall portfolio. I would also advise that you review the yield on your other single-stock holdings, and maintain if dividends are strong and they still fit with your initial assessment, otherwise don’t be afraid to reallocate.

Investments such as Botswana Diamonds (BOD), ITM Power (ITM) and S4 Capital are more growth-oriented and less likely to provide substantial income in the short term. I would sell these and reallocate to higher income-producing assets. You must base your decision on analysis and strategy rather than emotions or market hype.

If you are still keen on small caps. I recommend the Gresham House UK Multi Cap Income fund (GB00BYXVGT82), managed by Ken Wotton and Brendan Gulston. Their investment thesis would complement your existing holding as they don’t invest in companies linked to an external factor such as commodity prices, excluding companies in the real estate, banking, oil and gas and mining sectors. The team also focuses on small and mid-cap UK companies that would help further diversify the source of income.

You have approximately 70 per cent allocated to the UK market, through both direct stocks and funds. I would look to diversify your geographic exposure.

We use the Jupiter Asian Income Fund (GB00BZ2YMT70) in our models. This will give you exposure to dividend payers in the Asia Pacific region. The fund is run by Jason Pidcock, who has over 25 years of experience investing in Asian markets. Jason takes a pragmatic, uncomplicated approach to Asian dividend investing, focusing on well-established companies. Currently, Australia, India and Taiwan make up 60 per cent of the fund.

I suggest that you review the Rathbone Global Opportunities fund. Global equities can provide broad market exposure; however, the managers tend to invest in companies that are growing fast and avoid certain low-growth sectors. I would review the income yield of this fund and whether it is meeting your new income needs. I would recommend the Guinness Global Equity Income Fund (IE00BVYPP131): the team invests in high-quality cash-generative companies at sensible valuations. The fund has robust investment selection processes and invests in sectors that would complement your other holdings.

Alex Brandreth, chief investment officer at Luna Investment Management, says:

Your portfolios are in relatively high-risk investments, given they are mostly invested in stocks or high-yield bonds. These do provide an attractive income, but are you comfortable being a higher-risk investor and seeing more volatile swings in your capital value?

Your current Isa portfolio is too concentrated given you only have 18 individual companies. I would say that is a bit light and you should have closer to 30. Some of these companies are also on the smaller side, which makes them quite volatile. To obtain greater diversification, maybe consider allocating to funds; their broader exposure means you can diversify your portfolio better. Using funds does involve paying a fee, though. As well as being too focused from a stocks perspective, I also think that regionally you are too biased to the UK equity market. I would consider buying global income funds so that you can diversify your portfolio across other global stock markets.

This is on the basis that you are still comfortable being a higher-risk investor.  If you would like to reduce your risk, note that the change in interest rates over the past couple of years has meant that all asset classes have re-priced to offer higher income levels. There are other asset classes that you could consider; government bonds now have attractive yields on offer and would perform better in a risk-off environment when your equity investments would be likely to fall.  

In terms of Emily's Isa, I also think this is underdiversified. Again, similar to the above I would be looking at removing the three companies and adding another growth-orientated fund. 

In summary, think about risk. Your portfolios are focused on a small number of holdings, some of which are on the small side. Look outside the UK, as you are in your personal life: good companies are paying attractive levels of income all over the world. If you want to reduce risk now is a good time to be thinking about it.