Portfolio Dilemma: how do I build a ‘forever’ income portfolio?

Jake emails to say: I have always managed my own affairs but as I get nearer to 80 I find myself suffering from increasing tiredness, lack of concentration and slowness to act.

In short, I think I have to create a “forever portfolio” to provide me with a steady income with some continuing growth to replace my current portfolio, which while providing the necessary income, also has some very stressful small companies (many of which, while likely to prove good eventually, require too much monitoring now).

Needless to say the real problem is to decide which to release and how to rebalance, without giving up completely on this interesting but tiring part of the portfolio. Any suggestions?

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Stock picking, and investing, can be a highly rewarding endeavour for those with the adequate level of curiosity and zeal. 

But investors like yourself may understandably want to simplify their portfolio as they age.

Others might want to do so just to focus on other things – or to prepare for a time when a spouse or relative with less interest in investing inherits the portfolio.

While you don’t outline your exact holdings, you mention that the portfolio does generate income but also includes some “very stressful small companies”. 

There’s a conflict here, where you recognise the need to part ways with such holdings but are understandably reluctant to do so.

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Before we ask how much small-cap exposure is too much, let’s discuss the idea of a “forever portfolio” that delivers a steady income, plus some growth. As unpredictable as markets can be, this doesn’t seem like too big an ask.

As we recently discussed, income portfolios can come in many different forms, although it sounds like you may want something that generates income - rather than having to sell down holdings to free up cash.

The amount of income you need and your appetite for risk will inform what suits you best, but one of the approaches below, or a combination of them, might appeal:

Holding aselection of income-paying shares, with UK blue-chips like HSBC Holdings (LSE:HSBA), Shell (LSE:SHEL), BP (LSE:BP.), GSK (LSE:GSK) and Legal & General Group (LSE:LGEN) among the options. Some investors regard these as stable holdings but they are not immune to upsets: GSK shares sold off just this week on the back of weaker vaccine sales figures.

Using equity income funds, from UK options like City of London Ord (LSE:CTY) and Artemis Global Income I Inc (B5N9956) to global names like Murray International Ord (LSE:MYI), Fidelity Global Dividend W Inc Mlthly (BYSYZL7) and JPMorgan Global Growth & Income Ord (LSE:JGGI). Regional options are also available, from the high-yielding Henderson Far East Income Ord (LSE:HFEL) to Schroder Japan Trust Ord (LSE:SJG). These still carry plenty of risk but offer much better diversification than picking your own stocks.

Using “alternative” asset funds too, from infrastructure to property. There are good yields on offer but such assets have been under plenty of pressure in recent years.

Direct investment in gilts. You can lock in a yield and a return if you hold to maturity, but will have to go through the hassle of finding a new investment whenever a bond matures.

Multi-asset income funds. Perhaps the most hands-off route, but one where the choices are numerous. Some recent strong performers include IFSL Wise Multi-Asset Income B Inc (B0LJ016) and Fidelity MltAsst Inc & Gr W Inc (BFPC0C7). But it’s important to check how much risk each fund is taking (and how much equity exposure it has), and what yield there is.

Choices, choices

Unfortunately, the exact shape of your portfolio will depend on what suits your needs and your appetite for risk. 

But it would make sense to put the bulk of your portfolio into a diversified portfolio of income-generating assets, for example by holding a range of funds or using a well diversified multi-asset income fund.

When it comes to the smaller companies in your portfolio, these should arguably make up a very limited allocation. But it makes sense that you want to benefit from their potential growth, and that you maintain an interest here.

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Choosing which names to release is not easy. You might want to hold on to those you deem to have the most promise, or those that interest you the most. 

You might also only want to stick with a limited number of such holdings, based on how many you can still feasibly monitor.

One other way to rebalance might be to sell the small-cap holdings that have already performed well, and at least guarantee some level of profit.

It sounds like it will feel difficult to release such holdings either way. But it should also take much of the stress out of your portfolio.