‘We inherited 80 shares worth £885,000 – what should we ditch?’

We have been reducing the number of holdings – now down to 60 – and moving the smaller, riskier holdings into larger value stocks. So far this tax-year, the portfolio has generated £20,000 in dividends. We have mainly reinvested those as we don’t need the income at the moment.

My wife works part-time as a supply teacher, bringing in around £5,000 per annum. I am retired with public-sector pensions of around £17,000 per annum, plus self-employed income of around £5,000 per annum. 

We have savings of £180,000 most of which is earning 4.5pc interest. I have a so far untouched private pension of £120,000 from which I plan to take the tax-free lump-sum shortly and then to draw down on as necessary. 

My wife will be able to take her pensions of approx. £5,000 per annum from age 60. We will both qualify for the state pension at 67. 

Our mortgage is fully paid off and our three children are all financially independent. As far as the portfolio is concerned, we realise it is 100pc focused on equities, mainly in the UK, and still has a large number of holdings and still contains a large proportion of smaller, higher-risk companies, albeit with growth potential.

We would like to protect and grow the capital with a view to passing on as much as possible to our three children, but we will need it to generate sufficient dividends to supplement our pensions and give us both a reasonably comfortable retirement.

We’re prepared to take a long-term view and accept some risk and volatility in achieving that. We’ll probably keep some invested in smaller, growth-type companies but would like to just be able to let the majority remain fairly stable as we’re currently having to spend a fair bit of time monitoring and managing the portfolio.

What can you suggest?
A and A

Victoria says:

You’ve got all the right ideas – maximising your annual Isa allowances, reducing your overall holdings, sourcing income, and simultaneously focusing on capital preservation for your children’s inheritance.

I’m sorry about the loss of your father-in-law – he was clearly a very engaged investor. It’s wonderful to see how keen he was on supporting smaller UK companies through his array of Aim-listed stocks and it’s great to see him pass that baton to you both. 

But like you allude to, managing a portfolio of this size in terms of the breadth of investments can end up being a full-time job, a considerable burden during your precious retirement years.

It looks likely that one of your father-in-law’s motivations by investing in Aim stocks may have been to reduce his inheritance tax bill.

Most Aim shares are free from IHT if held for more than two years, so this is a smart way of passing on money to loved ones. 

However, since you and your wife are only 61 and 57, hopefully you won’t have to worry about passing on assets just yet, so you should feel free to move at least some of your portfolio away from the Aim and diversify internationally, as well as by asset class.

Nevertheless, he obviously put a lot of time into building this portfolio, so it would be a shame to completely rework it – why not consider keeping some of the shares that he backed?

As a starter for 10, it’s worth adopting the well-known investment mantra, cut your losses short and let your profits run.

Investments like ImmuPharma, HeiQ and XLMedia are dragging on your performance and might be worth reconsidering, unless you have a strong attachment to them.

At the other end of the spectrum, Dowlais Group, Warpaint London, Ergomed and Rolls-Royce have been standout gainers so who am I to mess with those.

Stock picking is not for the faint-hearted, and if you want to spend less time on your portfolio, another option is to consider outsourcing to a professional fund manager, while still backing smaller UK companies, which are currently cheap relative to larger companies and versus their historic valuations. 

If you decide to stick with managing your own investments, then funds and investment trusts are an easier way to remain diversified without having to keep abreast with so many different companies.

Take a look at Amati UK Listed Smaller Companies, which owns some Aim shares and has been investing in smaller UK firms for around 25 years, returning 920pc compared with 569pc from similar funds and 350pc for a benchmark index.

Henderson Smaller Companies investment trust is another leading fund in this area. The trust’s shares trade at a 13pc discount, so you are getting a top portfolio of UK shares at a discount to their listed prices.

Another route to repurposing your portfolio is to reinvest money from selling down your Aim shares into several “core” funds that are highly diversified and provide solid income and growth opportunities, both priorities for you.

This allocation could do the heavy lifting in your portfolio, allowing you to invest a smaller percentage of your portfolio in “satellite” funds and shares that are more adventurous.

Take a look at the Vanguard 40pc LifeStrategy Equity fund, which is a well-diversified low-cost global portfolio with a 40-60 split between equities and bonds.

The fund’s exposure to bonds could not only boost your portfolio’s income but also help it to weather the macroeconomic storm clouds given the sluggish global growth backdrop with a growing risk of recessions in the US, the UK and beyond. 

A global dividend fund I like is Fidelity Global Dividend, which has a long record of beating its peers. With a yield of around 2.5pc, it’s not shooting the lights out in terms of income, but its focus is more on dividend growers – quality companies that are growing steadily and increasing profits, but also returning capital to shareholders.

Top stocks include UK firms Unilever and RELX, as well as Swiss pharma groups Roche and Novartis.

For straightforward global equity exposure, have a look at BlackRock’s iShares Core MSCI World Ucits ETF, a tracker fund which costs just 0.2pc and owns about 1,500 of the largest companies listed in developed markets. If you prefer the idea of having an active fund manager, Terry Smith is the superstar in the space.

He buys firms with resilient business models and decades of growth ahead of them, meaning that he tends to perform well in both bullish and bearish stock market periods. Fundsmith Equity is his flagship strategy if you want to invest alongside him.

Finally, I’d suggest a dedicated bond fund. Bank of America’s latest fund manager survey of professional investors found that bonds are expected to be the best performing asset class in 2024, as interest rates finally fall, and inflation eases.

Rathbone Ethical Bond is a relatively safe option, yielding about 5pc by investing in sterling bonds, while Vanguard Global Bond Index £ Hedged captures bond returns from around the world, yielding nearly 3pc. 

You’re clearly both very engaged in the markets and are already steering the portfolio in the right direction. Just think about keeping things simple, holding a manageable amount of assets, and adding funds for diversification. Good 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