To retire at 51 you need a higher-yield

STEVE'S PORTFOLIO**

Source: Investors Chronicle and *Trustnet. **Everything is held in Isas or Sipps except holdings indicated in blue which are held in a non-tax-exempt trading account.

LAST THREE TRADES

ProVen and Foresight VCTs (to get tax back on my final income in 2013) and ETFS Industrial Metals.

WATCHLIST

Finsbury Growth & Income, Prudential and Northbridge Industrial Services.

Chris Dillow, Investors Chronicle's economist, says:

You say you have too much cash. Maybe so. But I'd caution against running it down too much, for three reasons.

First, cash represents only just over a quarter of your financial portfolio, and safeish assets - your index-linked bonds plus cash - are barely one-third of your wealth. This isn't grossly excessive: it's a lower proportion in safe assets than I have, for example.

Second, remember why cash returns are low. It's because central banks around the world are still worried that there are risks to economic growth. This warns us that there are risks to equities, and so it is dangerous to pile into shares merely because returns on cash are paltry.

Third, you don't need huge returns to generate the income you want. A real return of a little over 5 per cent per year on your non-safe assets would be sufficient to give you £60,000 a year while preserving your capital. Such a return is slightly over-optimistic but not grotesquely so. By all means shift some cash into equities. But don't think you need to do so massively.

Where you're right is to say you've diversified too much. There's a common problem here. It's a framing effect.

It's tempting to look at the vast range of assets on offer and think that we must hold many of them to diversify. This can lead to unwieldy portfolios. To simplify matters, change your frame of reference. Ask: what risks am I exposed to, and what assets protect me from them?

One risk is that your wealth won't grow sufficiently to allow you to get an income of £60,000 a year without eating into your capital. The assets you need here are equities, which offer (long-term expected) growth. I would urge you to have a simple tracker fund here as a core. This is because in the long-term there's a big risk of even good individual stocks getting into trouble. Tracker funds avoid this problem. They back the field rather than individual horses.

Another risk - which you are very sensible to spot - is inflation. Sure, this isn't a near-term risk. But it is over a 40-year horizon, not least because even slightly above-expected inflation compounds nastily. This matters not just because it raises your cost of living but because higher inflation is often bad for equities, too. Your index-linked bonds are a great idea in this context. But consider also some overseas holdings, as these protect you from a fall in sterling which would raise inflation.

Third, as you say, there's simple bear market risk. Your index-linked bonds are a help here. But it's in this context that cash is so useful.

A fourth risk is of low long-run growth - of 'secular stagnation'. This would not only limit your equity returns, but it would also keep returns on cash and index-linked bonds low, because low real growth should mean low real interest rates. There's no fantastic hedge against this - because such a scenario means low returns on assets generally. However, low real interest rates should help keep commodity prices high. As these also help diversify ordinary equity risk, this means there is a case for some exposure to gold and commodities.

I reckon that a handful of assets - cash, index-linked bonds, a UK tracker fund, an overseas equity tracker and some commodities - can protect you from the risks you're worried about. By all means add in some interesting share plays, wine, vintage guitars or whatever. But those should be a bit of spice, not the main ingredients.

James Baxter, managing partner at Tideway Investment Partners, says:

You look like you are struggling to make the switch from a classic 'random investment acquirer' to that of a portfolio manager tasked with generating a lifetime income from a finite amount of irreplaceable capital.

The former has time on their side and usually further capital down the track to make up for mistakes. The latter should be a much more precise exercise in risk management and income generation.

Our key criticisms would be:

• The yield of the portfolio is way too low versus the task in hand. Our estimate would be it is generating around £25,000 a year versus a spending requirement of £60,000. This forces you to rely heavily on capital gains year on year, or to consume capital, which will be uncomfortable with a potential 40 years of income needs ahead.

• As you identify there is too much money in cash or very low-yielding index-linked fixed income (combined this makes up 48 per cent of the portfolio).

• On the other hand, after a hard analysis of risk tolerance you may have too much invested in higher-risk, non-income generating, speculative investments such as smaller companies, emerging markets and commodities (23 per cent in total).

• While it's not entirely clear from your spreadsheet, we have a strong suspicion you most likely have the wrong assets in the wrong tax wrappers to be as tax-efficient as possible.

• With this many fund holdings, especially mixed asset type funds (Personal Assets being your largest holding, at 8 per cent of the portfolio), it makes keeping on top of asset allocations and therefore investment risk quite difficult.

We suggest you start with a plan of how you will meet the income target and control investment risk. Your £60,000 desired income equates to a 3.8 per cent after-tax yield. Split between two taxpayers, it will be perfectly possible to structure a portfolio that generates this level of income with some capital to spare for more speculative investing.

Focus on the high-yield bond, equity and property sectors to get this income job done. Bonds will give a greater degree of certainty as to the investment returns. Higher-yield equities will give better inflation protection over the long haul, but require you to stomach volatility in the shorter term. Similarly, property but with a lot less liquidity. Note, though, that funds such as Personal Assets and Ruffer are both yielding less than 2 per cent, which is way below your target.

The plan will also need to deal with the lack of access to cash and income from your pensions until you pass 55.