How can I inject discipline into my Sipp?

CHRIS'S SIPP AND ISA PORTFOLIO

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GLG Japan Alpha, Berkley Group Holdings. "I also like the thought of selecting four or five of the tipped Aim shares from the IC's Game Changers for my Isa, though less than £1,000 per company."

Chris Dillow, the Investors Chronicle's economist says:

I fear your ambitions for this portfolio are a little too high.

You say you’d like your Isas to grow to £250,000 in 13 years' time; I assume you mean in today’s money. However, if returns average 5 per cent a year after inflation - which might be a little over-optimistic - they will only grow to £150,000. If you want anything like £250,000 then you need to start paying in more - remember there will be new higher limits from July - and the sooner the better, to take account of compounding.

Your hopes for your Sipp, however, might be just about feasible. Based on current annuity rates, although you won't have to buy one, you'll need a pot of £800,000 to generate an income of £40,000 a year in 13 years’ time. Assuming 5 per cent real returns, and that you continue to pay in £17,800 a year and get basic rate tax relief on those payments, your pot should grow to just under £800,000 by then.

This isn't too bad, especially as there are other things going for you. It might be possible to generate a higher income over the next 13 years; a one percentage point rise will reduce your target pot by £134,000. You could, as you say, eat into that capital by drawdown. Or you might be able to postpone retirement if necessary.

To give yourself even more wiggle room, think about your spending habits. Do you really need £40,000 a year? You do (and more) if you want to visit top golf courses and drink premier cru wines, but you don’t if your hobbies are reading, gardening or playing music. Planning your spending and character can be as effective in giving you financial freedom as planning your finances.

Turning to your portfolio, one striking thing here is the strong bias towards defensive stocks. If the future is anything like the past, this is very wise; defensives have done better than they should around the world. The question is: why? If you think it’s because investors have irrationally avoided them in favour of sexier growth stories, then there’s a danger here. It’s that investors might soon wise up to the merits of defensives - or worse still, have already done so - in which case future returns might be poor.

However, there’s another possible reason why defensives do well. It’s that fund managers are underweight in them because they carry benchmark risk - the danger of underperforming the market in good times, which could cost the fund manager his job. If this is the case, then defensives are a genuine bargain for retail investors, because they offer us compensation for taking on a risk that needn’t worry us.

My inclination is towards the latter theory. And you are betting on this.

There is, though, a curious omission here. Aside from the TAM Premier Speculative Growth fund and some Japanese and emerging markets holdings, you have little direct exposure to general global equity markets. For a longer-term investor, this is an important gap because the core of any portfolio aimed at long-term growth should be exposure to general market risk. Whether you fill this gap by a John Baron-style general investment trust portfolio or by low-cost trackers is a secondary matter, but I would suggest you consider it.

What I’m not so sure you should do is worry much about Aim investments. You say you’d limit yourself to £5,000, which is reasonable given that there are reasons to suspect that Aim will continue to underperform in the long-run. But a £5,000 investment won’t make much difference to your total returns. Even if you make 50 per cent in a year - which would be remarkable - you’d add only 0.9 per cent to your portfolio’s total returns. That’s only the difference between one good or bad day per year. Think of Aim stocks - if at all - as mere flutters, not the core of your portfolio.

Lee Robertson, chief executive officer at Investment Quorum says:

If we base our assumptions upon your current monthly/annual subscriptions being upheld throughout the next 13 years, assume that the government continues with their tax incentives for pensions, and build in a compound rate of return of around 5 per cent per year, the Sipp could have a value in excess of £750,000. This should give you an income of around £33,000-£35,000 per year, based upon a yield of between 4.5 per cent and 5.0 per cent.

We would strongly recommend that you try to make full use of your annual Isa subscription allowance each year, given that this is a tax-free wrapper. We suggest with the noises around capping overall Isa limits at something like £100,000 it would be worth accumulating as much money as possible in case this does happen.

If you were to take advantage of the equivalent of this year's £11,520 full Isa allowance over the next 13 years, adjusting it upwards by an average rate of inflation of say 2.5 per cent, and compounding the returns each year by 5 per cent, your Isa value could be in the region of £375,000 which might give you another £16,000-£18,000 of natural income per year based upon a yield in the region of 4.5 per cent to 5 per cent and this would be free of tax unlike the pension income whether taken as an income or taken as a lump sum. If you can subscribe up to the new Isa limit of £15,000 that comes into forct in July, you could put away considerably more.

If we look at the current investments, and your comment that you are "not disciplined enough to manage the portfolio properly", you might consider revisiting your decision to invest in individual shares and work out a structured asset allocation policy either by using many of the online tools or by consulting with an adviser. A proper asset allocation and investment strategy would bring the discipline you desire and should deliver a structure to match your investment requirements, appetite for risk and longer-term income expectations.

While you own many good quality companies in your Sipp we would suggest that you consider a more structured approach, with an asset allocation using individual equities, funds or a mixture of both which focuses on a strategy of growth with reinvested income using dividend payments and income distributions from funds. This will take advantage of the powerful effects of compounding over the next 13 years.

Although individual stock picks can be very rewarding, they can also be devastating. But you state you are willing to be high risk and so if you are disciplined and pay very close attention to the holdings you could do well. If you are not able to do so then we would suggest diversifying risk via Oeics, investment trusts and exchange traded funds where appropriate.

Currently, some specific investment funds that we like are CF Lindsell Train UK Equity (GB00B18B9X76), M&G Global Dividend (GB00B39R2L79), Fundsmith Equity (GB00B4LPDJ14), Cazenove UK Equity Income (GB00B9F44D07), Artemis Global Income (GB00B5V2MP86), Old Mutual Monthly Income Bond (GB00B1XG8W96), and First State Worldwide Equity (GB00B45T6015) which all have growth and income characteristics.