Tips for staying on top of your investments in the retirement phase 

In the final chapter of our six-part retirement series, in which financial journalists offer a personal perspective on their own pension portfolios,Ceri Jones offers tips on how to monitor the performance of investments held in a SIPP at retirement. 

As star investor Warren Buffett famously said: “The first rule of investing is never lose money!” Over the last few years for example, you wouldn’t have wanted too much in Neil Woodford funds or too much money in value-focused funds. 

To avoid concentration risk, I limit individual shares to 2.5% of the portfolio and funds and investment trusts to 4%. In curtailing holdings to a pre-determined amount, if a stock starts to fall, this means I won’t give in to the temptation to double down and buy some more. 

It is important to stay diversified across sectors, strategies, funds and fund management houses. There may be risks you are not fully aware of. In the passive arena, although indices are designed to capture segments of the market, there is considerable overlap. 

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If you want broad US market exposure through an exchange-traded fund (ETF) tracking the up and down fortunes of the S&P 500, then the top holdings are Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN), Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL) and Johnson & Johnson (NYSE:JNJ). If you then want to add some tech exposure via an ETF tracking the Nasdaq, the top five holdings are Apple, Microsoft, Amazon, Facebook and Google. And it is the same top five for an ETF tracking the MSCI World index, with Johnson & Johnson up there too. 

Active versus passive funds 

Overall, there is more work involved in monitoring the performance of actively managed funds, in which a fund manager aims to beat the wider market. As a rule of thumb, financial planners suggest reviewing investments every six months to ensure they are performing in line with expectations. 

With funds, it can make sense to limit your exposure to any one fund house, as you may unwittingly be duplicating risk as the firm’s team of analysts will have favourite stocks that turn up in several of their funds, such as global, country and thematic funds. 

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As an investor, the only thing you can control is costs, but it is important to not get too hung up, says James Baxter, head of private clients at Tideway Wealth Management. While active funds generally cost 0.85% a year (the ongoing charges figure), some ETFs tracking the FTSE 100 and S&P 500 cost less than 0.1%. On a £10,000 investment this equates to £85 versus £10. 

“Yes, it’s important to save costs, but better to pay some fees to own the right investments whether that’s an active fund versus an ETF.” 

When to sell is trickier than when to buy 

Knowing when to sell out of a fund or stock is more difficult than knowing when to buy. For me, it is either when the story that initially prompted me to buy the stock starts to unravel, or when I’ve made a profit that is beginning to look unsustainable. Like many other investors, when I make a poor decision, I tend to hold too long rather than cut my losses. Neither do I run my profits for long enough when I have made a good call. 

For instance, my portfolio includes Ground Rents Income Fund (LSE:GRIO), which has faced a string of challenges such as the government clampdowns on leaseholds and cladding following Grenfell. My holding’s value has almost halved since 2017. Yet the shares trade at a 25% discount to its net asset value, and 43% of the lease income is up for review over the next six years. But even now I still retain the bulk of the holding, telling myself it may eventually turn around, and that prime minister Boris Johnston’s ‘build, build, build’ solution to Covid-19 may reignite the market. With hindsight I should have sold the lot as soon as I became aware of the leasehold review, limiting my loss to perhaps 5%.

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A very topical question is when is a share so expensive that you should sell it. A good rule of thumb is to consider selling if the company’s valuation becomes significantly higher than its peers, or its price/earnings (PE) ratio shoots way beyond its average P/E ratio in the previous five to 10 years. The popular tech shares Apple, Facebook, Google-owner Alphabet and Microsoft trade on PEs of around 40, but Amazon’s PE is even more exorbitant at 120, reflecting the growth of its web services which now generate 12% of total revenue, its success reinvesting profits into new ventures and solid growth in its Prime revenues.  

Watch out for ‘tax on investment success’ 

If you have a sizable self-invested personal pension (SIPP), there may be very little reward for trying to shoot the lights out with your investments. Anyone with a portfolio approaching £1 million will be penalised by the Lifetime Allowance (LTA) if they make investment returns that tip them over the limit, currently £1,073,100 for the 2020/21 tax year. The tax penalty, which is essentially a tax that penalises investment success, broadly equates to 55%. If you have an asset on which you expect to make a substantial capital gain, and are nearing the LTA, it may be best held outside of the SIPP wrapper. 

Usually, it pays to sell a company if it embarks on a cost control exercise. If the company has been struggling for a while, the market quite often breathes a sigh of relief that the problems are finally being addressed and the share price rallies. But don’t be fooled; this could be your big chance to exit the position before the shares fall back to earth. 

If you monitor your investments on a daily basis, then checking how the Asian market did overnight will give you a sense of whether the UK market will rise or fall the following day. In the current volatile market, it is easy to make (and lose) money by following momentum, particularly in popular stocks in the leisure and tourism industries, as they rise and fall on newsflow about the pandemic. 

When you no longer want the hassle – buy an annuity 

Staying on top of your SIPP investments can be a daunting task. Looking ahead, people tend to underestimate their level of cognitive decline, which can impact their ability to make good investment decisions later in life. One way to protect yourself is to buy an annuity with your remaining SIPP fund when you reach an age, perhaps your 80s, when you no longer want the hassle of running the portfolio. You will then have a guaranteed income until the day you die and, as you will be taking out the contract in your later years, it will be on much more attractive rates on account of your shorter remaining lifespan.

It can be helpful to have a good idea of how long you will live, accidents notwithstanding. Most people underestimate their life expectancy. Figures from longevity analysis service Club Vita suggest that men underestimate it by five years and women by eight years, says Rona Train, a partner at Hymans Robertson. Also, there are significant differences based on postcode, income and health at the point of retirement – up to around 11 years difference in life expectancy for a 65-year-old male.