Don't bet on £1m and reallocate to reflect your risk appetite

Her state pension will pay out £9,250 a year from when she is 66 and her defined-benefit pension will pay out £6,500 a year from when she is 65.

Ann is single, doesn't have any children and has no mortgage on her home. She has been investing since June 2014.

"I anticipate a retirement of about 20 years from age 66 to 86, and the possibility that I will need to fund supported living or care from about age 80," says Ann.

"I recently gave up a defined-benefit pension that would have paid £3,250 a year from age 65 for a transfer value of £115,000. I drip-fed this money into the market between April and August this year, investing it in First State Global Listed Infrastructure (GB00B24HJL45), Jupiter European (GB00B5STJW84), Legal & General International Index Trust (GB00BG0QP604), Legal & General US Index (GB00BG0QPL51), Lindsell Train Global Equity (IE00BJSPMJ28), Old Mutual UK Mid Cap (GB00B1XG9482) and Rathbone Global Opportunities (GB00B7FQLN12).

"I'm taking a more cautious approach with these funds, which were recommended by my Sipp provider. The other funds in my Sipp and Isa are my own selections.

"I'm too risk-averse to invest directly in shares and volatile funds, and prefer funds with more than 50 holdings. I generally avoid funds with charges of 1 per cent or more, and mostly don't invest in funds with a track record of less than three years. I prefer single price funds but do have some with a bid/offer spread.

"I also avoid funds with 'star' managers as with these I think you're only a heartbeat away from disaster.

"I don’t invest in Asia, other than Japan, or Africa, South America or emerging markets. My investments are diversely spread across North America, the UK and Europe.

"I don't sell in a falling market or at a loss, although I'd be prepared to lose 20 per cent in one year. If the market falls, you still want to be happy to hold – I follow Warren Buffett and his mantra that you should buy what you're prepared to hold forever. And, as I stay in the market, I don't hold cash intended for investment.

"About every six months, I even out the amount invested in the funds or add a new investment so I don't become too reliant on successful funds continuing to be successful. As funds are forward priced, I drip-feed my purchases in and sell down investments in regular stages to avoid being disproportionately affected by a one-day change.

"I will invest further in my Isa holdings and the Sipp funds, other than those I added earlier this year, spreading the sums evenly between them. But I only invest in pensions to the extent that withdrawls from them are subject to basic-rate tax. If there's any risk of higher-rate tax, I put the money into an Isa instead, which doesn't offer tax relief but from which I can draw a tax-free income."

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:

An issue here is whether you can meet your objective of a £1m Sipp fund by the time you are 66. You won't be able to achieve this from growth alone – that would require returns of over 13 per cent a year for the next seven years, which is very unlikely. So you'll need to make contributions of £40,000 to £50,000 a year to hit that goal, and even then you'll need at least average luck.

Unless you are able to make substantial Sipp contributions, you should prepare to have a pension pot of less than your target. This might not, however, be catastrophic. One benefit of not having children is that you may not feel the need to leave a bequest, so you could run down your wealth in retirement.

A second issue is that your strategy involves betting against momentum. By refusing to sell at a loss you're not cutting losers, and by rebalancing funds every six months you are cutting winners.

I'm not sure doing either of these things is wise. There's some evidence that there's a little momentum in funds – over shorter periods at least. This shouldn't be surprising – we know there is momentum in shares, so there should also be in portfolios of shares.

The solution to this is not to stop rebalancing entirely. The Financial Conduct Authority's recent report into the fund management industry found that "the majority of funds with historical outperformance do not continue to outperform the relevant market index or peer group for more than a few years". This tells us we shouldn't run winning funds for very long. So consider rebalancing less frequently, say, every 12 months, to take better advantage of shorter-term momentum.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says:

Your retirement plans look very well put together and you have lots of potential sources of income when you eventually retire. You might want to give some thought as to how you intend to get to your goal of a £1m Sipp, and how contributions are going to supplement investment returns, because I think it’s going to be a bit of a challenge without throwing more money into your pension.

Your retirement date is six years away, so it's an opportune time to give some thought to how you might take your income and shape your portfolio appropriately.

If you're thinking of drawing your tax-free cash or buying an annuity, it might make sense to start taking a little risk off the table with the money you have ear-marked for this purpose. I would say you don't want to be 100 per cent invested in the equity market the day before you take 25 per cent tax-free cash, in case there's a big one day fall.

>By refusing to sell at a loss you're not cutting losers, and by rebalancing funds every six months you are cutting winners. I'm not sure doing either of these things is wise

You have drip-fed money into the market, so you might want to think about drip-feeding money out of it to fund this withdrawal.

You probably need to reconsider your tolerance for losing 20 per cent of your portfolio value with these funds. I'm not saying it will happen, but with any equity portfolio there is a risk of higher losses in the short term. From peak to trough the UK equity market has seen almost 50 per cent wiped off its value in less than two years, and while we hopefully won't see a contraction of that magnitude for some time you should never say never. As you rightly point out, in these scenarios it's the ability to hold on for recovery in the long term which is important.

If you are going to leave your money invested and draw an income from your portfolio, then with this portion of your funds you can continue with a Buffett-style 'hold forever' philosophy. As you approach your retirement date in the coming years, you might want to think about tweaking your portfolio slightly away from generating growth and towards producing an income.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You have a minuscule cash weighting and a lack of bonds – in effect, almost no protection against a fall in the global market. In such an event most of your funds would probably fall together. This is because baskets of shares carry market risk – something which is pretty much impossible for an equity fund to avoid.

This matters, because I fear there is a high chance of a downturn over the next few months. Hitherto reliable leading indicators, most notably the ratio of the global money stock to prices, are warning us of the strong chance of the market falling slightly over the next 12 months. And even if you don't believe near-term lead indicators there's still a longer-term risk – there's around a one-in-six chance of share prices in seven years time being lower than they are now.

I find it odd that you can be too risk-averse to hold individual shares or volatile funds, but so risk-tolerant as to be heavily invested in equities. If you must hold such an equity-heavy portfolio, consider how you would cope if your portfolio falls. Possible outcomes might include having to postpone retirement or getting by on a lower income.

If you don't want these outcomes consider cutting your equity exposure.

Laith Khalaf says:

Your portfolio is well-diversified and includes some excellent fund managers. I also like your rebalancing discipline, which mitigates your risk of becoming heavily exposed to overheating areas of the market, while at the same time naturally topping up areas which might be undervalued.

I think 'star' managers do have a place in a portfolio, provided their reputation has been built on the basis of a long and successful track record, and in my view some of the managers in your portfolio already fall into this category – Terry Smith, Nick Train and Alexander Darwall.

Anna Sofat, wealth partner at Addidi Wealth, says:

Stock markets are at new and all-time highs following an unprecedented bout of coordinated global growth. The US, Europe, Japan and China are inflating, with even the Greek stock market up 45 per cent this year. Positive growth is driving corporate profits – a very supportive backdrop for equity markets. Technology, consumer discretionary and healthcare have done well, so your portfolio should be benefiting from holdings across these sectors, and its international equity exposure.

However, your aim of doubling the value of your investments before you retire would require growth of around 13.5 per cent a year. And should broader markets correct by 20 per cent, which is not entirely unlikely, it would take at least until your 88th birthday – without any withdrawals and with real returns of around 4 per cent a year – for your portfolio to recover and reach your £1m goal.

Your Sipp and Isa portfolios are invested almost 100 per cent in equities so this is a high-risk portfolio. During the 2007-08 financial crisis, for example, this portfolio would have fallen around 40 per cent, so it doesn't match your downside capacity for risk of 20 per cent. Although well-diversified, this would suit an investor with a downside capacity of 40 per cent.

So I would strongly advise you to reconsider the three dimensions of risk, as follows.

Your emotional capacity for risk. You say your your downside risk capacity is 20 per cent, but your portfolio is 100 per cent in risk assets, which is inconsistent with your risk profile. So I would suggest derisking by adding more defensive assets to the portfolio.

The level of risk you can afford to take. This depends on the level of the cash buffer and how long you expect to live. £4,300 in cash savings does not provide the capacity to withstand large market falls, and you've said that you don't sell in a falling market or sell at a loss

The returns you need. Your investment strategy should allocate to assets that balance risk and reward. You should consider adjusting the percentages invested in each asset class to satisfy your risk tolerance, goals and investment time-frame.

You need to decide if such a high level of risk is either desirable or required. I would argue no on both fronts, and urge you to derisk considerably, shifting to an asset allocation comprising 50 per cent equities and 50 per cent defensive mix.

My preference would be for more defensive holdings – a mix of cash and short-dated, high-quality bonds. I particularly like Vanguard Global Short-Term Bond Index Fund (IE00BH65QH62) which has an ongoing charge of 0.15 per cent.