‘I’m dismayed by my portfolio’s poor returns – what should I change?’

Victoria says: 

It’s brilliant that you’ve saved so diligently all your working life – that’s something few people think to do, and it’s inspiring to see how well it is paying off. 

You’ve already amassed an impressive portfolio worth nearly £200,000, and with sensible investment decisions I’m optimistic you can achieve your goals of long-term capital growth and an early retirement. 

It is good to see you’ve gone for a mix of individual shares when you feel comfortable, as well as funds and investment trusts to spread your risk, and even some individual bonds. 

I like how you’ve allocated 7pc of your portfolio to funds in Japan. It’s been a great year for Japanese shares and Warren Buffett has been adding to his holdings in Japan this summer – who am I to question the man widely considered the best investor in the world? 

However, I can see why you may be dismayed at your recent returns: while the Nikkei 225 index has gained about 25pc in local currency terms, or about 7.5pc in sterling terms, your two Japan funds have actually both fallen by around 13pc this year. 

That’s because it’s Japan’s largest companies whose shares have been rallying, and your funds are generally hunting for smaller, undiscovered gems, which tend to be more expensive. 

You could therefore look to add the HSBC Japan index fund to your Japan allocation. It has risen by 9pc this year and tracks the FTSE Japan index for just 0.14pc a year in fees. It would add some big Japanese companies such as Toyota and Mitsubishi to your portfolio. 

But yes, you may be spreading yourself too thinly and limiting growth, while 25 assets are probably too many to keep track of. While diversification is important, I think you could simplify things to make managing your portfolio easier; hopefully this will boost returns too. 

You’ll be able to see what’s working and what’s not more easily and make changes accordingly. Since you want growth, I think you’ve got too many income funds and stocks. 

Legal & General for example offers an attractive dividend but its shares have fallen sharply over the past year. 

Vanguard Global Equity Income and Vanguard FTSE UK Equity Income aren’t necessarily the best funds for an investor who seeks growth. Your Tesco and Barclays bonds would also better suit an income investor, such as someone at retirement age. 

With simplification and growth in mind, why not think about getting rid of at least some of these holdings to streamline your portfolio. This will also free up some money to really go for growth.

The next thing I notice is that half of your portfolio is allocated to Britain. While it’s good to go with what you know, the UK has underperformed the US and other European markets since Brexit so going global tends to serve investors better, especially if you are looking for growth. 

America’s tech giants have been responsible for a lot of the gains for US markets in recent years. No guarantees for the future, of course, but something to think about. 

With that in mind, I’d suggest thinking about some funds that are heavily invested in the US. You might like to consider Sanlam Global Artificial Intelligence, an active fund that costs only 0.5pc and picks winners from the AI revolution. 

It has almost doubled over the past five years and has gained 25pc this year. It has two thirds of its money invested in the US. 

A simple technology tracker, such as the Legal & General Global Technology Index fund, could work hand in hand with it. It costs 0.32pc a year and has delivered annualised returns of 17pc over the past 15 years by backing the biggest US tech names. 

It has become very concentrated in just a few stocks, which makes it vulnerable to a correction. Apple and Microsoft have 19pc and 16pc weightings in the fund, but that does not worry me too much as I think we’ll still be using iPhones and Microsoft Office 20 years from now. 

An alternative growth area worth considering is climate change technologies. Something like the iShares Global Clean Energy Ucits ETF, which owns 100 companies involved in clean energy from utilities to solar and wind power equipment manufacturers, could add another avenue for long-term growth to your portfolio. 

I should add, though, especially since you are dismayed by your portfolio’s recent performance, that this sector has had a torrid time of late. Long-term fundamentals look good, but expect some ups and downs and it may be a while before you start to see positive performance. 

A final point is that your allocation of just 3pc to commodities may not be big enough to move the needle. If you like commodities, why not consider allocating a more meaningful percentage of your portfolio there? 

Gold is worth considering as a hedge against economic uncertainty – you could look at the iShares Physical Gold exchange-traded commodity. 

Or for a diversified basket of commodities, including gold and oil but also things such as nickel and live cattle, the WisdomTree Enhanced Commodity Ucits ETF is one to research. 

So, with a bit of simplification, more US growth, less income and less UK, I think your portfolio will be able to move up a gear and propel you faster towards your goals. And it should be easier to tweak if something’s not working. 

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.