Change your unrealistic investment assumptions

She has three buy-to-let properties from which she receives a small income and on which the repayment mortgages will be paid off in 13 years. She also recently cashed in the majority of her portfolio to fund a large property renovation. Kate is single and doesn't have any dependants.

"Rather than overpaying my mortgage now I am investing surplus income in an individual savings account (Isa) and Sipp," she says. "My goal is to pay off the mortgage in four years rather than the 8.5 years remaining on it by cashing in my Isa and, if necessary, 20 per cent of my Sipp.

"The plan is to then concentrate on building up my Sipp and Isa by investing in funds and shares over the long term. However I am aiming to only work two days a week from age 60.

"I am unclear as to exactly how much I need to retire, but I expect to receive the equivalent of £20,000 in today's money a year gross from my buy-to-let properties when I am 65. Between age 60 and 65 I expect to live off a good percentage of this income. And I am hoping for a return of approximately £13,000 a year from my investment portfolio from when I am 65.

"I am a long-term growth investor and in the past have focused on trying to identify good fund managers. I used to allocate approximately £3,000 to each fund, and have in the past invested in blue-chip companies. Usually I leave investments for approximately five years.

"More recently I have been influenced by fellow investors who I met through an investment club. I also have been acting on the odd tip from Investors Chronicle articles, and both have led me to invest in Alternative Investment Market (Aim) shares.

"I recognise that my strategy is risky, but I believe I have to take some risks to achieve my goals. I wouldn't want to lose more than £5,000 in any year, and if I did I would extend my time horizon to enable me to reach my investment goals, and try to adjust my portfolio to address the losses.

"But because I'm hoping to retire in the next 10 to 15 years I wondered if it would be appropriate to buy income-generating shares now and reinvest the income, as if they also grow in value the dividend could be greater in the coming years?

"I have been investing for 19 years, but am not good at following up my own ideas. If I had invested in the favourites on my investment watchlist over the past year I would be up 233.37 per cent on Bitcoin Investment Trust (GBTC:QXR), 36.80 per cent on ARK Web x.0 ETF (ARKW:PCQ) and 56.88 per cent on Fevertree Drinks (FEVR).   

"I have only recently decided to take the plunge and follow my instinct by investing in Ark Web x.0 ETF and XBT Provider AB Bitcoin Tracker EUR (BIT-XBTE). I am keen on these investment vehicles as I believe over the long term they could do very well.  

"I plan to continue to drip-feed money into my favourite funds – Old Mutual UK Mid Cap (GB00B1XG9482), Marlborough UK Micro-Cap Growth (GB00B02TPH60) and Scottish Mortgage Investment Trust (SMT).

But I am interested in other investments, including mining exchange traded funds (ETFs), Global X Uranium ETF (URA:PCQ), Albermarle (ALB:NYQ) and Katanga Mining (KAT:TOR).

Kate's portfolio

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS READER'S CIRCUMSTANCES.

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

I'm not sure your main objective is feasible. To get a return of £13,000 a year after inflation requires a portfolio of over £250,000. It's unlikely that your portfolio will grow sufficiently to reach this size without additional investment. To get to this size you would need an annual real return of almost 8 per cent. And it's even more unlikely if you use the portfolio to pay off your mortgage.

You don't say how much you're saving each year, but it should be a lot if you want to have enough to pay off your mortgage early and grow your portfolio sufficiently to get that 13 per cent return. If you don't already, invest in funds via monthly direct debits. Doing this imposes the discipline of saving, and you need to do this if you are to achieve your goals.

Tamsin Hazell, chartered financial planner at Succession Group, says:

Your three buy-to-let properties and Isa and Sipp put you in a healthy financial position. If you hope to generate an income of £13,000 a year from your Isa and Sipp from age 65, assuming that you wish to only draw growth and income, your portfolio would need to increase to a value of approximately £260,000. But with a compounded return of 5 per cent a year, after 14 years, your current portfolio would only have a value of approximately £180,000. However, this will not necessarily present a problem if you are prepared to erode some of your capital when you come to draw down on your funds.

>It's not just market risk you're taking – you're also taking cyclical risk

While you are still working, in addition to setting funds aside to repay your mortgage, it is worth making use of your Isa and Sipp allowances where affordable. You can contribute up to £20,000 to an Isa in the current 2017/18 tax year, and up to 100 per cent of UK relevant earnings, excluding dividends, into a Sipp, up to the annual pension allowance limit. Within this limit your Sipp contributions receive 20 per cent tax relief, and you can reclaim further tax relief up to your highest marginal rate from HM Revenue & Customs.

As you are likely to phase your retirement, ensure your Sipp offers full flexi-access drawdown, which will enable you to draw on funds as and when required, in any amounts and frequency.

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

Why do you want to pay off the mortgage on your residence so soon? Why on earth would you cash in tax-free growth funds such as your Isa and pension tax-free lump sum at age 55 and lose the next umpteen years of compound interest, when the increasing amount would be set to turbo-charge? Surely your mortgage rate is far below your investment returns? And if not, why not, given the secular benign stock market environment we've had for over eight-and-a-half years?

I would consider changing your plans. Why not instead seek to reduce the borrowing on the buy-to-let properties by selling one? I appreciate that buy-to-let has been a worthwhile investment until recently, backed by tax benefits. But that is changing and the tax situation could get much worse, for example tax relief could disappear completely. Write-off expenses are already being slashed and stamp duty has increased.

So you should sit down with a good independent financial adviser or tax adviser to help you find the best plan for your future.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You're correct to say that your strategy is risky as it's not just market risk you're taking – you're also taking cyclical risk. In a domestic economic downturn your mid-cap and micro-cap funds would probably do badly. And in a global downturn your Indian, European and natural resources funds might also do badly.

In one sense, this isn't a problem. On average, investors are well rewarded in good times for taking cyclical risk. However, at some point in the next 14 years such a downturn is pretty much inevitable.

Consider how you would cope with this. If your job is secure and you would be content to delay going part-time then you have, in effect, some insurance against such a situation. If not, you should consider shifting to safer assets.

You ask whether you should buy income stocks, but there is not a one-word answer to this because these fall into two distinct categories. Some have a high yield as compensation for their extra cyclical risk, for example certain construction and banking stocks. Buying these would add to the risks you are already taking.

But others have a high yield because investors believe they offer little future growth, for example utilities, big pharmaceuticals and telecoms. These stocks are worth considering because they tend to be defensive – they typically fall less when the market falls. Such stocks tend to be underpriced: research from around the world over long periods tells us that they do better than they should over the long run. You own few of these.

Your bias is in the opposite direction – more towards speculative stocks. These are risky, and not just because they are especially sensitive to swings in investor sentiment.

One big problem with them is that investors are too quick to infer that a stock has good growth prospects simply because it is in an exciting new industry. What they forget is that corporate growth is largely random and unpredictable. I would therefore take a sceptical view of your holdings in Bango (BGO) and Taptica (TAP). The key question is whether these have what renowned US investor Warren Buffett calls economic moats – attributes such as brand loyalty or unreplicable technology – that give them a degree of monopoly power. Without these they are vulnerable to competition from new upstarts.

As you can imagine, I'd be happier with a portfolio that contained at least a few tracker funds which, in effect, back the field rather than particular horses.

Tamsin Hazell says:

You have invested money earmarked to repay your mortgage and hope to access it in four years, which is a relatively short period of time in the context of investing. So you could consider lower-risk funds to limit volatility.   

But with up to 85 per cent of your investment portfolio in equities, including Aim stocks, your current strategy is relatively high risk. And your three buy-to-let properties and main residence mean that a large proportion of your wealth is dependent on the property market. But diversification across asset classes, sectors and geographical regions is very important, so it is worth reviewing the underlying holdings of your funds to try to avoid too much overlap.

It is also advisable to hold ample cash in deposit accounts to act as a contingency fund. This will help your cash flow position in the event of void rental periods, and hopefully mean you won't need to sell any of your invested funds at a low point in the market.

Alan Steel says:

Why did you buy the investments, when did you acquire them and how did you select them? What is your investment process, and how do you decide when to sell?  And why do you have so much in cash – almost 16 per cent.

Also, why do you believe you need to chase risk? There is nothing wrong with a bit of speculation, such as via your holding in XBT Provider AB Bitcoin Tracker EUR (BIT-XBTE), but this should only account for a small part of your wealth. And be prepared for this to go wrong – it looks like an extreme bubble to me. 

You like managers such as Giles Hargreave at Marlborough, Avinash Vazirani at Jupiter, Richard Watts at Old Mutual Global Investors, the teams at AXA Framlington Health (GB0003506424) and Scottish Mortgage Investment Trust, and to a lesser extent Terry Smith.

You also reckon it's a good idea to fill your boots with individual stocks, presumably following tips. But being particularly good at this in theory isn't like the real world in practice. 

If I were you, I'd select maybe around 10 outstanding managers of funds and investment trusts, taking a world view, having a mix of growth and value style investors, and concentrating on quality. And then stick to it.

Such managers have a well worked process of buying cheap and holding on, and also have sell disciplines.

You already have exposure to Giles Hargreave and Terry Smith via the Marlborough UK Micro-Cap Growth and Fundsmith Equity (GB00B41YBW71) funds. But you could also consider Rathbone Global Opportunities (GB00B7FQLN12) run by James Thomson, Baillie Gifford Global Discovery (GB0006059330) run by Douglas Brodie and Invesco Perpetual Global Smaller Companies (GB00BJ04HH03). 

Alongside these you could hold a fund such as CF Miton Cautious Multi Asset (GB00B0W1V856) run by David Jane or Trojan Global Income (GB00BD82KP33) run by James Harries to mitigate downside.