Building a high growth Isa

"I prefer to take income out of capital growth and take advantage of the annual capital gains allowance," he says. "I think I am prepared to put between 50 and 75 per cent of my portfolio in the high-risk category in anticipation of greater returns. My life expectancy is about five to 10 years and my wife's is about 20 years. We both have pensions which are adequate.

"I like the US market and some of the stocks listed on it, and prefer exchange traded funds (ETFs) and investment trusts to open-ended funds, unless the latter are really well managed.

"Recent trades include buying BlackRock Frontiers Investment Trust (BRFI), and selling Aberdeen New Dawn (ABD) and Aberdeen Asian Smaller Companies (AAS) investment trusts. I also sold some of my holding in Hargreaves Lansdown Multi-Manager Balanced Managed Trust (GB0005890487).

"On my watchlist I have Transense (TRT), BlackRock European Dynamic Fund (GB0000495209), Bunzl (BNZL), Schwab International Small-Cap Equity ETF (NYSE ARCA: SCHC), Vanguard Health Care ETF (NYSE ARCA: VHT) and Stryker Corp (NYSE:SYK)."

Chris Dillow, Investors Chronicle's economist, says:

There's a lot I like about this.

One is your use of lowish-cost ETFs to give you a diversified portfolio.

Another is your creation of income from capital gains. Many investors who want income make the mistake of holding higher-yielding stocks. This has the double cost of skewing their portfolios unnecessarily because some high-yielding stocks are risky, and it creates a tax liability. Well done on avoiding this.

I also like your interest in frontier markets. Economic theory says such markets should offer decent returns. One reason for this is because they are illiquid and so should offer a liquidity risk premium. Another is that investors in poorer countries face higher risks from investing in shares because losses are more painful: you can tolerate falling share prices if it means postponing buying a new BMW, but less so if it means taking your children out of school. Frontier markets should also offer a risk premium on this count. What's more, less developed markets should be less well integrated into the world economy and so their stock markets might not be so highly correlated with the global market - which offers you some diversification potential.

When investing, overconfidence is dangerous as it can lead us to trade too much. In avoiding this error and trusting funds instead, you're steering clear of a common way of losing money.

What's more, your pursuit of higher returns seems reasonable, even if it's not to everyone's taste. If your pensions are adequate and you have a large cash holding, any losses on this portfolio should be tolerable.

I do, though, have a couple of issues with it. One is that despite your enthusiasm for ETFs and investment trusts, both of which have the virtue of low fees, you seem to be incurring unnecessarily high charges. You've got two funds of investment trusts which have high annual management fees, and two multi-manager funds which are also quite expensive.

This matters because fees compound nastily over time. For example, over five years an extra one percentage point per year of fees - the difference between fees on funds of investment trusts and a tracker fund - could easily cost you over £3,300 in normalish market conditions for a £50,000 investment.

The only way such higher charges can be justified is through higher performance. But this is not guaranteed. Any fund of investment trusts will be highly correlated with the global equity market simply because baskets of shares are correlated with each other: market risk is unavoidable if you're holding lots of stocks. This makes sustained out performance - superior returns in both good and bad times - very difficult.

In holding high charging funds of funds rather than simple tracker funds, you're incurring a certain loss in exchange for the uncertain prospect of out performance. I'm not sure this is a good deal.

This is especially true because you already hold a well diversified international equity portfolio. Your ETFs and fund holdings diversify nicely across countries, and thanks to smaller companies funds across segments of shares too. I'm not sure whether funds of funds bring anything to the party.

Herein lies a downside to having a decent portfolio. If you have diversified exposure as you do, it's difficult to improve upon one's portfolio and quite easy to detract from it by holding either redundant assets - ones which replicate the performance of existing holdings - or ones with unnecessarily high fees.

Investing is a bit like planting stuff in your garden. You've got to know when to stop.

Alan Steel, chairman, Alan Steel Asset Management, says:

With your wife's life expectancy about 20 years your portfolio needs to perform well for some time to come.

Your high-risk strategy looks to have worked, though to what extent depends on when the shares and funds were acquired. William Bernstein, long-term successful US investor, reckons private investors have a one in 10,000 chance of investment success, and there are signs you may be one of those rare examples, given the success over the last five years of American Express (AXP:NYQ), Finsbury Growth & Income Trust (FGT), Henderson Smaller Companies Investment Trust (HSL) and Schroder UK Dynamic Smaller Companies (GB0031092942).

But there is also a motley crew of rather poor performers in your portfolio like Royal Dutch Shell (RDSA), and a mixed bag of ETFs and funds. The Hargreaves Lansdown Multi-Manager Balanced Managed Trust (GB0005890487) may look cheap but has been trounced by many more expensive funds managed by great stock pickers such as like Ed Legget who runs Standard Life Investments UK Equity Unconstrained (GB00B0LD3B90), or Thomas Moore, manager of Standard Life Investments UK Equity Income Unconstrained (GB00B1LBSS23).

Relying on growth strategies as you do can be quite a risky business especially in retirement. You must have noticed that three times in the last 14 years there have been 40 per cent falls in major indices like the FTSE 100 and S&P 500, in addition to the odd bloodbath in emerging markets or sectors such as technology, financials, and oil & gas. And it is likely there will be another during your and or your wife's lifetime.

You have to ask yourself, how would you react to such an event? How did you manage the crisis in September 2008 or the rally from March 2009? Did you sell at the wrong time and not buy at the right time? And why, given the dire deposit rates since April 2009, have you not embraced high yielding funds?

If this were my portfolio I would be inclined to rationalise these holdings. Simplify and reduce exposure to individual stocks, trim gains from American Express, and if you believe, as I do, that a secular bull market could be in place for a few years to come (albeit with the odd scary moment), I'd build in more small-cap exposure. European small-caps look cheap just now. I would also find more mid and small-cap US managers given the amazing opportunities in that country from areas such as robotics and energy.

I'd build in some income funds, such as Rathbone Income (GB0001229045) run by Carl Stick or Standard Life Investments UK Equity Income Unconstrained.

And I would reduce the portfolio to around 12 funds.

Finally have you thought about inheritance tax planning? It looks to me like there's almost £400,000 taxable at 40 per cent. It would be a shame to make gains just for your beneficiaries to pay a big slug of them to HM Revenue & Customs.

Our reader's portfolio

Source: Morningstar & Investors Chronicle

Currency conversions as at 9 April 2014