36-year-old aims for £40,000 income at age 55

36 YEAR OLD'S SIPP AND ISA PORTFOLIO: VALUE £153,796

Source: Reader. *Sipp = self-invested personal pension, Isa = individual savings account.

LAST THREE TRADES

BlackRock Latin American (BRLA) and BlackRock World Mining (BRWM) "due to discounts on both trusts and their large dividend yields".

Vanguard FTSE Developed Europe Ex UK (GB00B5B71H80) "due to reasonable valuation of European equities and quantitative easing by the European Central Bank".

WATCHLIST

Pacific Assets Trust (PAC) because "I like the management approach and would like a higher India weighting"

Smaller companies because "most of my funds invest in large caps".

Chris Dillow, the Investors Chronicle's economist says:

I fear that you will struggle to achieve your objective of an income of £40,000 per year in 19 years' time.

As a rule of thumb, I'd assume a long-term return on equities of 5 per cent a year after inflation. Property, being similarly risky and also geared to economic growth, should deliver a similar return. However, 16 per cent of your portfolio is in bonds, commodities and cash. Real returns on these look like being very low. If we assume a zero return, then we should expect a total return on your portfolio of 4.2 per cent a year. Over 19 years, and assuming you do invest £15,000 per year (in real terms) in each of those years, this would grow your wealth to just over £760,000 in today's money in 19 years' time. £40,000 a year out of this implies a yield of 5.2 per cent. You could probably only get such an income by eating into your capital.

Now, there are a lot of uncertainties around this projection, some on the upside and some on the down. The point is that you shouldn't bet on meeting your objectives.

So, what can you do? One possibility is to increase your equity weightings. You are right to believe that bonds, cash and commodities diversify you against many types of equity risk. In this sense, they offer insurance. However, this insurance is now very expensive in the sense that you forego a lot of expected returns in order to buy it.

You might think that a higher equity weighting is risky. But is it? The risk for you as a long-term investor isn’t so much year-to-year fluctuations in share prices as the risk that you’ll fall short of your target wealth. In this sense, a low equity weighting is risky.

What's more, as a young man you can use time diversification. Your planned savings are quite high relative to the size of your portfolio. This means that you can use future returns to hedge against short-term losses. If the market falls this year, your £15,000 will buy more equities which means you can profit from any bounceback.

I can also appreciate why you might not want a higher equity weighting. Even over a period as long as 19 years, good and bad luck might not even out. And a moderate amount of luck would get you that £40,000. Failing that, you could work longer; move into a cheaper house; hope that your income rises enough to allow you to save more; or reduce your income expectations.

All that said, I have three quibbles with your asset allocation.

■ Mining stocks don't have a low correlation with other assets. In fact, they are highly correlated with emerging markets. Yes, commodities often have a low correlation with equities - but their producers do not.

■ The fact you're a long-term investor does not justify a high weighting in developing economies. Even if these do offer good long-run GDP growth - which is doubtful - the evidence shows that this growth does not translate into long-run equity returns. By all means buy such markets if you think they are cheap. But do not do so because they offer long-term growth.

■ I'm surprised you're buying a European fund because you think the markets are reasonably valued. For Europe, valuations are not the issue. The question is: will the euro crisis be resolved satisfactorily or not? If yes, shares will rise a lot. If not, they won't.

Gavin Haynes, managing director of Whitechurch Securities says:

Based on your current portfolio valuation and adding to £15,000 to your Isa/Sipp investments each year, if we assume 6 per cent a year compound growth, the pot would reach £1m when you turn 55.

If you could generate 4 per cent income at that time this would give you £40,000. However, if we look ahead 20 years and make the large assumption that inflation is the same as the past 20 years (average 2.9 per cent), an income of £40,000 at retirement will have the spending power of £23,000 today.

Given your long-term perspective, the 70 per cent/30 per cent split between equities and other asset classes is realistic to achieve your goals. Howver, be careful not to fall into the trap of having too many holdings - you already have 36.

As you are investing in collective investments (which already provide diversification), 20 to 25 holdings is enough to provide sufficient diversification while ensuring each position is large enough to make a meaningful contribution. Unless you are looking to build up the smaller holdings they should be recycled into existing funds.

The UK exposure is large-cap focused with a skew to index funds and equity income through Invesco Perpetual High Income (GB0033031484) and Edinburgh Investment Trust (EDIN). These two holdings are managed by Mark Barnett and follow the same strategy. I would concentrate exposure on Edinburgh Investment Trust which has a lower charge and can benefit from geared exposure to a defensive equity portfolio.

I am a big advocate of the power of dividend compounding in boosting long-term returns. With many UK blue chips facing headwinds to grow dividends, you should add UK equity income exposure with a smaller company bias. PFS Chelverton UK Equity Income (GB00B1Y9J570) and Unicorn UK Income (GB00B9XQFY62) are strong in this area. For further exposure to UK smaller companies, Aberforth Smaller Companies Trust (ASL) on a 10 per cent discount (as at 30 January 2015) is worth considering.

For core overseas exposure we recommend Artemis Global Income (GB00B5ZX1M70), while FP Argonaut European Enhanced Income (GB00B7KG1P88) is a high-yielding fund that hedges the euro and would complement your core index position.

The breadth and quality of companies in the US stock market should not be ignored in a global equity portfolio, but you have very little exposure to US equities. I agree that valuations do look to be pricing in a very positive scenario. However, if there is a pullback it may be a good time to add some long-term exposure. In contrast you should monitor your large Japanese exposure closely.

I agree with having a material weighting in Asia and emerging markets for long-term investors. The Pacific Assets Trust (PAC) has been a strong performer. For a contrarian play, Martin Currie Pacific (MCP) has been re-structured over the past year and trades at a wide 12 per cent discount (as at 30 January 2015).

Your non equity exposure is well diversified. I believe that commercial property is an alternative bond proxy at present and having less than 4 per cent in bonds may not be a bad thing given the miserly yields on offer and the risks attached when interest rates rise.