Seeking an income to sail through retirement

"This portfolio will be fine for our lifestyle if the dividend income doesn't plunge, and we will be able to add in around £15,000 a year of state pension in a couple of years," says Keith. "We enjoy concerts, opera and occasional meals out, and have a yacht.

"What I probably fear most is a collapse in dividend income resulting from a collapse in global growth, and a long run deflationary global environment. However, I do feel that the risks of this are mitigated by the hands-on approach that central banks seem to play these days.

"I hope the overall dividend income will keep pace with inflation, although I do not have any difficulty in taking an income greater than the natural yield from the portfolio. But I aim to avoid doing this for five to 10 years unless we see some pretty good numbers.

"In working out what income we need during retirement, I have factored in a 15 per cent reduction in dividend income from current levels as a worst-case scenario. This fear is what led me to diversify into commercial property, peer-to-peer lending, European asset-backed securities and commercial property investment trusts. But, unfortunately, several of these diversification plays have suffered quite striking capital losses since I bought them, notable examples being TwentyFour Income Fund (TFIF) and P2P Global Investments (P2P).

"That said, I have a fairly stoic attitude to sharp corrections and bear markets, and would be far more likely to err through buying at the top of the market than selling at the bottom. If the average investor is a momentum crowd-follower with a tendency to buy stocks when overvalued, then I'm probably Mr Average. However, my long-term game is recovery and growth, with a healthy dividend stream to keep us going. We will access this shortly by drawing down from a self-invested personal pension (Sipp).

"My approach is very much to wait for recovery in Asia where I believe in the long-term future prospects, and also in biotechnology and growth stocks. I do not see age as an obstacle to holding these, given my willingness to ride out any storms.

"I also believe that investment trusts investing with high levels of conviction are a better longer-term bet than passive funds, particularly in the sectors I favour. That said, I am considering buying exchange traded funds (ETFs) that, over time, should reduce the risks of mid-term capital losses and require less monitoring and annual balancing.

"My approach is also to wait for recovery with commodities. But I will probably reduce the risk of the portfolio a bit in around 10 years or when valuations have considerably increased - whichever happens sooner.

"I believe in time in the market rather than market timing. However, it is only during the past year that I've managed to become fully invested. I held way too much cash during the bull run following 2008-09 credit collapse, missing out on substantial growth as a result. Now that I have retired from regular employment I aim to stay fully invested, funding purchases primarily from sales of growth/recovery stock investments - when they have grown or recovered - so we may have a wait.

"I don't think age should determine the percentage of our allocation to areas such as bonds or commercial property. My view is that income requirements, attitudes to risk, overall wealth and health are more significant determinants than age, although they are related.

"Having built a reasonable portfolio with well-diversified holdings, most of which is sheltered from tax via Sipps and individual savings accounts (Isas), and having enough income from the portfolio and our investment properties to live on - even factoring in a moderate dividend collapse - we can afford to stick with some potentially higher-risk investments. And, with our situation and portfolio, are they really high risk?

"I am not inclined to increase the number of holdings to more than 20: as these are all collective investment funds this provides more than enough diversification, particularly given the focus on fairly high conviction managers.

"I have three flats in Edinburgh as I still dabble in property development projects, two of which are tenanted, and one of which is a holiday let. I believe that demand will be strong from tenants in the capital city, regardless of whether Scotland remains part of the United Kingdom, though clearly life could become a little more complex if we are still living in England.

"I also have a stake in a commercial property in Jersey which is now under offer and hopefully will soon be sold adding to our cash reserves.

"My last three trades were purchases of JPMorgan Japanese Investment Trust (JFJ), International Biotechnology Trust (IBT) and Woodford Patient Capital Trust (WCPT).

I have on my watchlist:

Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL)

Vanguard FTSE All-World UCITS ETF (VWRL)

City Merchants High Yield Trust (CMHY)

iShares Sterling Corporate Bond ex-Financials UCITS ETF (ISXF)

Aberforth Geared Income Trust (AGIT)

HICL Infrastructure Company (HICL)

I am also considering selling the following investment trusts, if any of these have a good run: Scottish Oriental Smaller Companies Trust (SST), Scottish Mortgage Invesment Trust (SMT), Murray International (MYI), JPMorgan Japanese Investment Trust, International Biotechnology Trust, Fundsmith Emerging Equities Trust (FEET) and City Natural Resources High Yield Trust (CYN)."

Keith and his wife's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You are right to say that age is irrelevant as a factor in determining asset allocation. What is relevant, though, is that you are exposed to a small, but nasty, risk. The fact that you have a £2m+ portfolio yet still fear something suggests you might be taking on too much risk.

I'd quibble with your belief in the long-term prospects for Asia and growth stocks. We know for sure that economic growth does not translate into equity returns, and that historically growth stocks have underperformed value. These two facts warn us that investors have on average paid too much for growth - be it corporate or national economic growth.

But you have a simple solution here. The "buy when prices are above their 10-month (or 200-day) average and sell when they are below it" rule has worked well, for both emerging markets and speculative stocks. It allows us to ride uptrends while getting us out of long bear markets.

You say you are more likely to err through buying at the top of the market than selling at the bottom. While I applaud your self-awareness - which is an underrated virtue in investing - the fact is that this .simple rule would save you from both mistakes.

Paul Taylor, chartered financial planner and discretionary fund manager at McCarthy Taylor, says:

You intend to use a Sipp to go into drawdown. To do this, you should consider using a modern platform pension, which will provide all the investment choices you may want at a much lower cost. An independent chartered financial planner could give you further help with this if you need it.

You are right to be concerned about income sustainability in a low inflation and low interest rate environment. Historic earnings of 5 per cent from a well-balanced portfolio are now more likely to be around 3 per cent with traditional safe assets such as short-dated gilts, yielding not much above 1 per cent.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

The key question here is: does this portfolio offer adequate protection against your biggest fear, a collapse in global growth? I fear not.

For one thing, I'm not as confident as you that central bankers can protect us. We know that they cannot see recessions coming - perhaps because such events are genuinely unforeseeable. And while they and governments do have the tools to boost growth - a helicopter drop would work - they would be slow to use them. Investors should not trust in the Yellen/Draghi put.

Secondly, although your portfolio is well-diversified internationally, this is no protection against global recession. National stock markets tend to fall together in bad times.

Thirdly, although property and equities are lowly correlated in normal times over short-term frequencies, they would fall together if the global economy does badly - your prospective tenants would be less able to pay decent rents. In this sense, you could lose on both your property and share holdings.

Luckily, there's a simple solution here - to hold foreign currency such as US dollars, Swiss francs or euros. I say this because sterling is a risky asset that tends to fall in bad times such as in 2008. This gives you profits on foreign exchange to set against equity losses. Also, there's a tendency for sterling to fall when UK property prices fall, so again foreign exchange gives you insurance.

Of course, all insurance comes at a price. The problem here is that foreign exchange pays next to zero interest and would lose you money if global appetite for risk increases, boosting demand for sterling.

However, this might be a price worth paying. In the event of a rise in risk appetite, equities would rise, thus giving you gains to set against foreign exchange losses. And your target of an income of 3.5 per cent a year is sufficiently modest that you don't need to be fully invested in risky assets - there's nothing wrong with making small capital withdrawals.

Paul Taylor says:

You have explained your approach to investment very well and your experience is reflected in your choices, which are generally very good - in particular, Finsbury Growth & Income Trust (FGT) and Woodford Patient Capital Trust, managed by highly respected fund managers Nick Train and Neil Woodford, respectively.

But we do have concerns about Murray International Trust, which accounts for 7 per cent of your portfolio and has underperformed over the past five years. It grew just 24 per cent, while the IT Global Equity index rose over 44 per cent and the FTSE World ex-UK index grew by just under 59 per cent more than the same period.

Consider replacing it with Tritax Big Box REIT (BBOX). This real-estate investment trust (Reit) with exposure to 'big box' assets in the UK has been a real winner for us, returning more than 44 per cent since the beginning of 2014. With a half-yearly dividend and yield of about 4.4 per cent, this is an attractive option for adding solid income.

Big box assets are large distribution centres and logistics hubs. Since 1995, Tritax has acquired and developed commercial property with a total value of over £2.5bn. Tenants include Marks & Spencer (MKS), Next (NXT) and Rolls-Royce (RR.). The UK logistics market benefits from strong demand in high-growth areas of the economy, as well as limited stock supply. The UK has been one of the fastest adopters of online retail, driving demand.

We would also suggest you consider Vanguard FTSE UK Equity Income Index Fund (GB00B5B74684), which yields about 4.6 per cent and is a low-cost tracker with an ongoing charge of just 0.22 per cent. It has a good tracking record and would provide a good flexible counterbalance to the property holdings.

You might also consider infrastructure as an alternative to property and equities - in particular, International Public Partnerships (INPP). This yields 4.5 per cent and, although it trades at a premium, this has recently reduced.