Personal Finance: Investment Masterclass - Simple ways to stay safe

NAMES: SHEENA AND IAN CARMICHAEL AGES: 57 AND 63 OCCUPATIONS: MANAGEMENT CONSULTANT AND RETIRED TEACHER

The Carmichaels are at that point in their lives when they need to look ahead make sure their investment strategy and income provision are sufficiently covered. They have a sizeable portfolio worth about pounds 190,000 and they expect to sell a second house and have up to pounds 85,000 to invest. The aim of this Investment Masterclass is to assess the quality of their investments and to see if the twin objectives of capital appreciation and income can be met from the existing portfolio, and how the additional sum can be invested.

The adviser: Tim Cockerill, managing director at Whitechurch Securities, independent financial advisers in Bristol (0117 9442266)

The advice: We start by ensuring there is sufficient money held within the building society. With low interest rates and the outlook for that level to remain or drop further, the building society is not a good long- term home for money. But it is important for emergency money and foreseeable expenditure. Once a figure has been decided, say, pounds 25,000, Mr and Mrs Carmichael can look at the rest of their portfolio.

The balanced approach is most important. The Carmichaels' portfolio is made up of 53 per cent in products which give direct exposure to the stockmarket, 17 per cent in fixed interest and the remaining 30 per cent in "middle ground" investments, such as with-profit bonds.

The couple have made full use of PEPs and Mrs Carmichael has selected individual blue-chip shares as long-term investments and has done very well. These shares bear familiar names such as Halifax and Abbey National, with other companies she decided offer good value and opportunity. In all, Mrs Carmichael has holdings in about 12 shares, which offers reasonable diversification, but 20 would be better. Any investor overweight in individual shares should realise that if the company takes a turn for the worse, as in the case of M&S, the impact on the portfolio can be significant. Mrs Carmichael has two overweight stocks, IBM her previous employer, and Abbey National, and these holdings should be reduced by up to 50 per cent and new stocks selected. The portfolio also includes holdings such as Mercury European Privatisation Investment Trust and Morgan Grenfell Equity Income Investment Trust. Both are high-quality funds and should provide excellent long-term growth.

The popularity of corporate bonds has soared. They offer a high fixed income at a time when interest rates are falling and they offer diversification to an investment strategy. Their inclusion within the Carmichaels' portfolio is ideal, and they have selected well-known companies, such as M&G, Norwich Union and Perpetual, all of which have good records in this area.

The lower-risk investment consists of a with-profit bond with Scottish Widows, from whom they will receive a windfall payment, and a Friends Provident Distribution Bond and High Income Bond. This investment adds balance to the portfolio and can be expected to give steady appreciation. The High Income bond is paying 10 per cent net and winds up in two years. Unfortunately, there is not an equivalent bond paying 10 per cent these days.

Mr and Mrs Carmichael have a high quality portfolio and all the income- producing investments are reinvesting the income which leads to further growth. The great thing about the portfolio is that when they need more income they can simply "turn it on". For example, the three corporate bond holdings can have their status changed from accumulating income to paying income. This gives the Carmichaels flexibility. There may come a point when they will wish to sell holdings such as the Mercury European investment trust because it does not produce much income.

Mr and Mrs Carmichael need to consider carefully how to invest the house sale proceeds. They do not need to add further money to the building society account. The most should be made of any unused tax allowances, in this case the pounds 7,000 available for investment into an ISA (pounds 14,000 in total).

I would suggest they utilise the Newton Higher Income unit trust and the Threadneedle Equity Income Trust for their ISAs. Both are high- quality investment houses whose equity income funds is producing over 3 per cent gross. Under the ISA, 10 per cent of the tax can be reclaimed. Depending on Mr Carmichael's consultancy work and their future need for income they may wish to consider zero dividend preference shares. Mrs Carmichael had expressed an interest in these and they would suit the middle ground sector nicely.

Zero dividend preference shares are available through split-level investment trusts. They have a predetermined rate of capital growth and up to 8 per cent is achievable. The return comes in growth which can be offset against your capital gains tax allowance. They are a high-quality and low-risk equity investment, traded on the stockmarket every day, which means there is no lock-in period. Many investors use the annual growth to supplement "income" and so could Mr and Mrs Carmichael. I suggest they put about pounds 50,000 into zero dividend preference shares. We have already allocated pounds 14,000 to ISAs. The remaining pounds 20,000 (approximately) I would place in further equity-based products such as unit/investment trusts with an income bias. The benefit of this strategy is that the income stream will appreciate in real terms and the capital will also appreciate in value.

I would suggest pounds 7,500 in Jupiter Income, pounds 7,500 in Gartmore UK Income and pounds 5,000 in Britannia Higher Yield.

The Carmichaels' existing investments are good quality and have a balanced structure. Their investments will need to generate income and growth for many years, so the inclusion of zeros adds another dimension, while the equity income trusts will safeguard their capital and income. These may seem simple solutions to their investment needs but simplicity is often the best way.

The Independent is offering a free Guide to High Risk/High Reward Investment, which outlines the commonest ways savers can obtain higher-than-average returns on their funds. The guide, sponsored by Whitechurch Securities, is written by Nic Cicutti, personal finance editor at The Independent. It is available by calling 0800 374413

If you would like free financial advice on how to invest a cash lump sum or regular savings, write to Nic Cicutti, Investment Masterclass, The Independent, One Canada Square, Canary Wharf, London E14 5DL. You must be prepared for your name and picture to appear in the paper