Expert Advice: Diversifying a Strong Portfolio for Long-Term Success

A 49-year-old easyJet pilot with a substantial financial portfolio has sought advice on optimizing his investments for retirement. The investor, who wishes to retire at 58, currently holds an £830,000 pension pot and £450,000 in additional investments. While his financial position is strong, there are opportunities for improved diversification and risk management.

The core of the investor's pension is invested in the Vanguard FTSE Developed World ETF, which tracks stocks from 23 developed countries. However, this fund has become increasingly concentrated in the "Magnificent Seven" tech companies - Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla - which now account for approximately 20% of the fund's value.

To mitigate this concentration risk, it's advisable to consider allocating some funds to equal-weighted ETFs. These instruments, first introduced in 2003, distribute investments evenly across all constituents, potentially reducing exposure to overvalued stocks. Options include the Invesco S&P 500 Equal Weight ETF and Xtrackers S&P 500 Equal Weight ETF.

For active management exposure, the Dodge & Cox Worldwide Global Stock fund presents an interesting option. Founded in 1930, Dodge & Cox has a long history of value-oriented investing. This fund currently focuses on financials and healthcare, with limited technology exposure, offering a contrasting approach to the market-cap weighted indices.

The investor's significant position in Shell, purchased during the 2020 market downturn, has yielded impressive returns. However, it's crucial to consider the risks of such a concentrated position. Consulting a financial advisor regarding capital gains tax implications and potential diversification strategies is recommended.

Regarding fixed income, the investor's allocation to UK gilts could be complemented by international bonds. The Vanguard Global Bond Index £ Hedged fund, which tracks approximately 14,000 investment-grade and government bonds globally, offers diversification benefits while mitigating currency risk through hedging.

"When focusing so much of a portfolio on one stock, always take a step back and consider whether you are happy to stomach a big loss in pursuit of a big gain."

For additional portfolio protection, consider allocating a small portion to wealth preservation investment trusts. Capital Gearing Trust, established in 1963, and Personal Assets Trust, founded in 1983, invest in defensive assets including gold, which has been valued as a safe-haven asset for millennia.

As retirement approaches, it's essential to regularly review and adjust the portfolio to align with changing goals and market conditions. With a well-diversified strategy and careful risk management, the investor can work towards a secure retirement that includes their desired lifestyle and financial objectives.