Be more realistic about your future returns

Calvin also has a small online business that generates a nominal profit of £5,000 a year. He may focus on this if he is made redundant or when he retires.

His wife works part-time for a salary of £13,000 a year and also has a generous workplace pension.

"I hope to make a total return of 7 per cent a year – or whatever the maximum growth possible is over the next five to seven years, so that from about age 60 I can draw down 4 per cent of my pension a year," says Calvin. "I plan to use the 25 per cent tax-free cash from my pension to pay off the £220,000 outstanding on our interest-only mortgage. I am making overpayments into my pension to take advantage of the 40 per cent tax relief to help fund this. We intend to stay in our home for at least the next 10 years. 

"Also, my mother-in-law is elderly and we expect to inherit £150,000 from her within the next five years.

"I have been investing for two years because after my parents passed away I reviewed my finances and consolidated my pensions into one Sipp, including a workplace defined-benefit pension worth £320,000. I did this because if I had died my wife would have got less than half of its value, and I also want to build up a portfolio to pass on to my children.

"My wife has also consolidated her previous pension pots into a Sipp and she is about to transfer a further £26,000 into it. We are thinking of investing this in BlackRock Frontiers Investment Trust (BRFI), CLS Holdings (CLI), Empiric Student Property (ESP) or maybe McDonalds (MCD:NYQ), given the current exchange rate and long-term prospects of this company.

"I invest my Sipp in funds and stocks that I aim to hold for between five and seven years, mainly reinvesting any dividends. I will sell them sooner or reduce my holding if, for example, a fund's manager or performance projections change, or a structural change affects a share's rating.

"For example, I recently sold shares in Pan African Resources (PAF) worth £4,200. At one point my investment in this company was up over 50 per cent, but I subsequently sold it at a 45 per cent loss because I read an article that said shares with a yield over 7 per cent yield and a price/earnings ratio of less than 7 rarely recover.

"I have also recently sold shares in Renishaw (RSW) worth £2,500 because I think it is overvalued. I made a profit on them of 135 per cent after holding them for two years. And when I made a return of 30 per cent on Apple (AAPL:NSQ) I trimmed my holding so that it accounts for less than 10 per cent of the overall portfolio.

"I recently bought shares in Clinigen (CLIN) worth £4,000 since their price was lower than their high point, and it seems to have better longer-term earnings and growth prospects than Pan African Resources. And at the beginning of the year, I added more Asian and Japanese funds and sold a gold exchange traded fund (ETF).

"Although I aim to hold most of my investments for the long term I have a few speculative holdings, including Blue Prism (PRSM), IQE (IQE) and Micro Focus International (MCRO).

"I do not want to have more than 30 holdings in my Sipp, and plan to keep a close eye on its performance, review it once a year and re-align it if required.

"I have a heavy weighting to equity-based investments because I am targeting the maximum growth possible. I understand that equities can make losses, and direct shareholdings in particular are high-risk. But they have the potential for long-term growth and I think I can tolerate the volatility because of my timescale.

"I also think that bonds, which have been considered lower risk than equities, are at risk because rising interest rates will result in capital losses for these assets."

Calvin and his wife'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 suspect your hope of 7 per cent average annual returns might be too high, at least in real terms. Since 1900, real total returns on UK equities have averaged 5.6 per cent a year,  and that's over decades when things mostly went very well for equity investors. Given that valuations are not obviously below average, it would be imprudent to expect better returns than that average, and wise to assume lower.

If we assume average returns of 5 per cent a year, you can reasonably expect an income of a bit over £30,000 a year from the age of 60. This is assuming your Sipp grows to over £600,000. Your company money-purchase scheme should grow to a value of £150,000 by then and your wife's Sipp to £100,000. Add in your likely inheritance and deduct the repayment of your mortgage, and you can expect a total pension pot at age 60 of around £800,000. If you draw down 4 per cent of this per year, you'll get £32,000.

This is less than your current income, so can you get by on that?

And although 4 per cent a year is commonly considered to be a reasonable drawdown rate, it is not safe. If we assume a long-term average real return on your portfolio of 5 per cent a year and historic equity volatility, there's a chance of around 10 per cent that your wealth will fall over 10 years – even if you don't take any money out of it. This would mean your total pension pot falling below £500,000 by the time you are 70.

This should't be a problem if you are only concerned with maintaining your and your wife's living standards. But it does highlight that a 4 per cent drawdown rate does not by any means guarantee that you'll be able to pass on your capital intact to your children.

Martin Bamford, managing director of Informed Choice, says:

You need a benchmark that is unrelated to how markets are performing or have performed historically, but instead is related to the returns you need to make each year to achieve your personal financial goals. You already know what your timescale is as you will need this pot of money in the next five to 10 years.

If the 25 per cent tax-free cash from your pension is your only means of repaying your interest-only mortgage in five years, you will need to grow your pension to at least £880,000 by that time.

But remember that pension rules could change and taking 25 per cent of their value tax-free might no longer be possible when you want to do this. So there's an argument for taking the maximum possible tax-free cash now and using it to repay a chunk of your interest-only mortgage. Doing this effectively creates a guaranteed return on this quarter of the pension pot, especially with the likelihood of rising interest rates.

As long as you don't take any taxable income from the rest of your pension pot, you will still be entitled to the annual pension contribution allowance of up to £40,000 a year. But if you flexibly take taxable income from a pension pot you are restricted to the lower money-purchase annual allowance of £4,000 a year. And in your case this would be very restrictive.

Lots of factors influence a sustainable withdrawal rate in retirement, but you could work on the basis of being able to withdraw up to 3 per cent of your pension each year from age 60, without running too great a risk of running out of money.

You should provide for you and your wife before thinking about leaving an inheritance for your children. We're living much longer and all too often expensive care fees wipe out any planned inheritance in the later stages of retirement.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Your portfolio seems to have a bias towards what Warren Buffett calls economic moats – companies with the monopoly power to protect their profits from competition. Examples of these include Apple, Coca-Cola HBC AG (CCH) and some of City of London Investment Trust's (CTY) holdings.

Historically, this has been wise. For years investors under-rated the importance of monopoly power to earnings growth. I wonder, though, whether this is still the case. I suspect one reason for the increased valuations on companies with good moats in recent years is that investors have cottoned on to their merits. This means such stocks might now be overpriced.

You've also got exposure to proper stockpickers such as the managers of Castlefield CFP SDL UK Buffetology (GB00BKJ9C676), Fundsmith Equity (GB00B4MR8G82) and Scottish Mortgage Investment Trust (SMT). But if you hold too many such funds you dilute away any good performance, leaving yourself exposed only to market risk. For example, if Fundsmith Equity beats the market something else must underperform. The more things you hold in addition to it, the more likely you are to be holding underperformers.

Although buy-and-hold can be a good strategy, I'm not sure it works for individual companies other than a tiny minority of the very strongest ones. In a healthy competitive economy, even apparently good firms will eventually see their profits competed away. We cannot predict the winners and losers from this process – especially over long periods – just ask investors in Kodak or Nokia (NOK1V:HEX).

For me, this is an argument for investing in global tracker funds: in effect, they back the field rather than individual horses.

Martin Bamford says:

You are an adventurous investor and have had some success with this approach in the past. But there's no guarantee that your past performance will repeat itself. So as you have a sizeable pension fund at stake, you might want to consider scaling back your risk level as you approach retirement age.

You're right to be wary about the risk of capital loss fixed-interest investments face. With the prospect of rising interest rates the capital values of bonds – especially gilts and investment-grade corporate bonds – could fall sharply.

However, bonds play an important diversification role in a portfolio. And the speed and size of any interest rate rises in the UK will depend on a number of factors, including how well our political leaders manage to execute the departure from the European Union.

So there's a place in your portfolio for bond investments that are less sensitive to rate rises. Many fixed-income managers have already taken steps to move up the credit spectrum and cut duration in their portfolios, which should make their funds less prone to capital loss in the event of further rate rises. Bond funds would also help offset any short-term capital volatility in the global stock markets. Although this bull run might have longer to run, there may be a return to more usual levels of market volatility.

You could also take slightly less risk in your Sipp by shifting away from direct shares towards collective investment funds. Investing in funds would result in greater diversification and could also reduce your costs of investing.

You plan to buy and hold investments, reviewing them once a year, which is a sensible strategy and should mitigate any emotional responses to fluctuating market valuations.

Adrian Lowcock, investment director at Architas, says:

You have had a successful start to your investment career. However, markets have been very good for investors over the past two years, especially equity markets, and all good things must come to an end.

Your portfolio has allocations to areas that have driven markets for the past two years. There is a bias to technology via your exposure to the US market, of nearly 40 per cent. Although technology has rewarded investors in recent years it is not without its risks, as some of these companies are priced for perfection.

You also have a significant allocation to smaller companies, which contribute to the high-growth strategy you want to achieve but bring with them higher risks.

Your portfolio is primarily invested in the US and UK markets with little exposure to other areas, so lacks diversification. And your bond exposure is focused on the higher-risk areas of fixed income, such as emerging market debt and high-yield bonds.

Your portfolio has very little protection built into it, so although you think the bond bull market will continue you have not prepared for the possibility that you might be wrong. Very few investors predict when equity markets will crash, and this usually happens at the peak of a bull market when confidence that the good times will continue is at its highest. 

So although this portfolio could help you achieve your financial objectives there is a very high risk that something might go seriously wrong. You need to consider what the consequences would be if your portfolio fell 20 per cent or more in the run-up to your retirement. This could result in having to delay your retirement by a few years or, even worse, being significantly and permanently worse off in retirement.

Investing, especially for retirement, is a combination of two things: protecting what you have worked hard for and growing it at a reasonable rate. To do these two things I would consolidate the portfolio into around 15 investments, as small holdings have little impact on the overall performance of a portfolio.

In view of how close your retirement is, I would suggest having a combination of income, growth and capital preservation strategies including bond, property and absolute return funds to diversify the portfolio. 

Investing in direct shareholdings requires constant monitoring, a lot of hard work and investment knowledge, so I suggest reducing your allocation to these. Your exposure to high growth could be achieved via expert fund managers instead.