How I achieved financial freedom at age 39

SIMON'S EXTRA EARLY RETIREMENT PORTFOLIO

KEY POINTS

• The portfolio is held tax-efficiently. Two-thirds is held in individual savings accounts. The remainder is outside Isas but generated income of £10,000 which is less than the personal allowance.

• All positions are held via low-cost execution-only accounts.

• Simon also has a pension that should provide £15,000 income from age 60.

How Simon achieved financial independence

■ He avoided student debt.

■ He had an academic career followed by a well-paid middle-ranking career in a FTSE 100 company.

■ He controls his living expenses.

■ He rents a property with spouse and child.

■ He has always invested fully in individual savings accounts (Isas) and his company share scheme.

■ His savings rate is an impressive £35,000 a year.

■ He has had fortunate investment timing and lump-sum payments from redundancy and inheritance

■ He has a company pension scheme as a 'back-up plan' for his later years.

ASSET ALLOCATION TIPS

Ben Yearsley, head of investment research at Charles Stanley Direct, says:

You are too young at 39 to be taking 5 per cent income from the portfolio. That isn't giving you much chance of long-term capital growth. If you assume a 7 per cent total return is the norm with 3 per cent income and 4 per cent growth that is more realistic. Linked to this is the 35 per cent weight in bonds (and property that many consider bond like).

You are spot on with your view of just taking the natural income, though - with the majority of your money in Isas that is tax efficient. You need to ensure that any bond funds are in the Isa to maximise the tax-free income. Dividends attract no further tax to pay outside an Isa if the investor is only a basic-rate taxpayer like yourself.

I can't criticise the diversification in your portfolio but maybe thin down some of the weightings slightly; as well as spreading risk, this will also have the benefit of spreading income payments. I do wonder whether 1 per cent positions are worthwhile as they don't really give you any extra diversification.

It may well be a 'balanced' portfolio, but is it right for a 39-year-old with 50 years to live? A third of his portfolio will effectively not grow, putting a huge strain on the other two-thirds of the portfolio to produce capital growth and also income growth. I honestly cannot see why you would want this much, if anything, invested in bonds if you are looking to effectively inflation proof your portfolio for income and growth for the long term.

Is the UK equity positioning correct? What about a bit of small cap in there as well as the mainly large-cap exposure or indeed even a multi-cap income fund?

Your cash position seems low if you are living off your investments. What happens if we enter a bear market? Your income could fall quite quickly - so it might be worth edging cash levels up a bit.

Lee Robertson, chief executive officer of Investment Quorum, says:

Your portfolio is allocated to the following asset classes;

• Equities - 58%

• Bonds - 30%

• Property - 3%

• Cash - 4%

• Alternatives - 5%

I am happy with this asset allocation and the split between the UK and international equity exposures seems sensible.

Commercial property and alternative strategies do come with a degree liquidity risk but your exposure is only 8 per cent. In terms of bonds, it is likely that we will see further compression in sovereign bond yields as the ECB executes its quantitative easing programme and central banks around the world continue to cut interest rates.

The investment outlook is looking quite difficult with continuing uncertainties surrounding the eurozone, a slowing Chinese economy, brewing currency wars and some doubts over continuing corporate profits in the US due to the strengthening US dollar. However, many investors like you continue to seek yield and therefore this is becoming a rather crowed trade, but until we see a substantial pick-up in interest rates, or bond yields, this is likely to continue.

I am not sure that moving to reduce risk by reducing your exposure to equities makes much sense as this is an asset class that on a valuation perspective continues to look relatively cheap against sovereign bonds, although less so to higher-yield and corporate bonds. There is, of course, always a higher risk of defaults within higher-yield bonds which are providing some of your yield.

Jason Hollands, managing director, business development and communications at Tilney Bestinvest, says:

At a time of record low interest rates, historically low bond yields and slowing dividend growth, achieving a 5 per cent yield on a portfolio is frankly a challenge without being drawn into esoteric asset classes that carry greater risk to capital or where liquidity could dry up. That is rarely going to make sense for an investor wholly or largely reliant on investment income to fund their lifestyle.

This portfolio it has way too much exposure (27 per cent) to high-yield debt issued by companies with weak credit rates and this has resulted in a portfolio with historic average volatility of 7.5 per cent a year, a level more akin to an adventurous growth portfolio than one primarily focused on generating income to live off. It also has around 10 per cent invested in commodities: with China slowing, weak global growth and oversupply of oil, the outlook for commodities is poor in my view.

Investors looking for income-generating investments need to be particularly careful when considering investment companies or investment trusts, as many are trading at very significant premiums to their net asset value (NAV). P2P Global Investments is trading at a thumping 15 per cent premium, Juridica Investments at 7.5 per cent, Standard Life Property Investments at 7.1 per cent, Starwood European Real Estate Finance at 4.7 per cent. Additionally, ICG-Longbow, TwentyFour Income, Invesco Perpetual Enhanced Income, City Merchants High Yield and Murray International are also trading at premiums - let's hope none of these were purchased recently.

Income fund recommendations

Mr Yearsley says:

Merchants Trust is a bit lacklustre and I would rather have Finsbury Growth & Income (FGT), which yields less to start with but has a better long-term record.

Murray International (MYI) has been solid, has a decent record of dividend growth and Bruce Stout is a very good manager.

There's nothing wrong with Sarasin Global Dividend but global equity income is a competitive area so you could add Artemis Global Income (GB00B5N99561) or M&G Global Dividend (GB00B39R2R32).

Mr Robertson says:

The following high-yielding funds may be of interest to you:

Fidelity Enhanced Income (GB00BD1NLJ41) - yield 6.46 per cent

Artemis Global Income (GB00B5N99561) - yield 3.5 per cent

Royal London Sterling Extra Yield Bond (IE00BJBQC361) - yield 6.65 per cent

Mr Hollands says:

In the main, it is a better time to be choosing income-generating investments from the open-ended funds universe. However, ardent investment company fans looking for elusive yields might look at Bluefield Solar Income Fund (BSIF), this is a London Stock Exchange-listed investment company which owns operational solar power plants and it is trading at a slight discount to NAV, unlike most other infrastructure companies. Most of the revenues are underpinned by long-term contracts under the UK government's renewable energy incentives schemes and these contracts have built-in inflation-linked increments.

While the CF Woodford Equity Income Fund and Merchants Trust provide exposure predominantly to large-cap income stocks, investors might consider diversifying their sources of UK dividends further down the market cap spectrum to funds that allocate more into mid- and small-cap stocks. These parts of the market are more domestically focused, where the earnings outlook is better than the FTSE 100. Funds worth considering alongside traditional, large-cap biased income funds are Standard Life UK Equity Unconstrained Income (GB00B7G8Q193) and Unicorn UK Income (GB00B00Z1R87).

Consider some exposure to European yield-generating stocks. European shares are more attractively valued compared with long-term trends than either US or UK stocks and the combination of the recently announced QE programme by the European Central Bank, and the fillip provided by the fall in energy prices, should provide a supportive backdrop to European equities at a time when those investing in sterling are doing so from a favourable exchange rate. Standard Life Investments European Income (GB00B3L7S958) is my preferred European income fund.

Patrick Connolly, a certified financial planner at Chase De Vere, says:

Consider Schroder Income Maximiser (GB00B53FRD82). The underlying stocks in the fund are based on the Schroder Income fund, although covered call options are used to sell the upside on some stocks in order to produce extra income. It pays a yield of 6.9 per cent a year and this high level of income could give scope to hold other funds which are more suitable but have a slightly lower yield.

The other area I would look at is bonds. Three of the four holdings are effectively high-yield bond funds and even the Henderson Strategic Bond fund has a significant weighting in high yield. If bonds are being held to provide extra protection and diversification then there are better options, albeit with lower yields. Rathbone Ethical Bond (GB00B7FQJT36), paying 4.5 per cent a year, is a good choice and an excellent diversifier.

BlackRock Commodities Income - one to sell?

Mr Yearsley says: "Your weighting to BlackRock Commodities Income (BRCI) is too high. I like the team, but it hasn't been a great area to be invested in for the last three or four years. I have no idea when this sector will turn, therefore I wouldn't advocate selling, just a warning flag that it is quite a risky position."

Mr Robertson says: "BlackRock Commodities Income Fund might be vulnerable to a dividend cut given that the portfolio is invested in international commodity companies, including oil businesses. The collapse of base metal and oil prices will likely mean that will see corporate profit warnings and possible dividend cuts, which would impact on the performance of this particular fund, exposed as it is to what is happening in this sector."

Mr Connolly says: "BlackRock Commodities Income looks out of place in this portfolio. It is a high-risk fund as demonstrated by its performance, having fallen by 25 per cent in the past three years. Psychologically it can be difficult to sell a holding which is showing a big loss. However, what matters is its future prospects. This remains a high-risk fund, and while it could bounce back, it could just as easily fall further. If this fund is held it should be in the alternatives section with a much lower weighting. A better alternative is Artemis Global Income (GB00B5N99561), even though that fund is yielding only 3.5 per cent."