This group of funds offers a balance of total return and stability.
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By Christine Benz | 09-24-09 | 06:00 AM | Email Article

In last week's column, I discussed a model portfolio for a very conservative retiree. The portfolio is designed to provide stability, inflation protection, and a modest total return for someone with a 10-year life expectancy.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

I've received many insightful responses to that article, and I also appreciate all the people who have weighed in with comments. (The Comments field is located below each article.) Some of  you e-mailed to let me know that you were appreciative of in-retirement guidance; others e-mailed with requests that I feature portfolios for people at your life stage.

Whereas last week's portfolio was ultraconservative, this week's portfolio is geared more toward a middle-of-the-road retiree: someone with a life expectancy of 15 years or so and a moderate risk capacity. (The Centers for Disease Control provides some good tables to help estimate your life expectancy.)

Before I get into the specifics of this week's model portfolios, here are some general guidelines about the portfolios.

Investment Specifics
My recommendation of  Dreyfus Appreciation  in last week's retiree portfolio sparked a healthy debate about that fund's pros and cons. (I was the only one arguing the "pro" side, really.) I recommended the fund in large part because it has a sizable percentage of what our stock analyst team calls "wide-moat" stocks--companies with sustainable competitive advantages. We've been examining the link between moats and performance and have found, preliminarily at least, that stocks and funds with wide moats have exhibited good downside protection. Because it's harder to claw your way back from losses than it is to avoid them in the first place, I think retirees, in particular, should focus on investments that have historically done a good job of reducing losses. That said, there are viable alternatives to nearly all of the investments I've recommended in these portfolios. If you have a favorite fund that lands in the same catgory as one I'm recommending, by all means use it instead. 

Total Return, Not Income
As with last week's retiree portfolio, this week's portfolio is focused on providing total return rather than generating current income (i.e., it assumes that the investor may dip into principal to fund living expenses rather than living solely off of the portfolio's income stream). Yields are so low currently that I recommend such an approach for most investors, as you'd need to take on extreme risk to generate a livable income stream at this point.

Strategic, Not Tactical
These portfolios are designed to be strategic rather than tactical, meaning that they're meant to be bought and held rather than traded. In general, advisors, fund managers, and other so-called experts have not made a compelling case for tactical management, which in turn raises questions about individual investors' ability to time these moves correctly. That said, I didn't completely ignore the current market environment in putting them together. You'll notice that I've downplayed Treasury bonds in the fixed-income portfolios, for example, largely because Treasuries still remain pricey relative to other types of bonds. On the stock side, I've emphasized funds with a high-quality tilt.

Other Income Sources
As with any model portfolio or one-size-fits-all asset allocation, these portfolios are blunt instruments. While the time horizons may match your own, your own personal circumstances will dictate whether any of these portfolios are approriate for you. For example, readers who have sources of income other than their portfolios and Social Security--such as pensions or part-time jobs--may well be able to tolerate higher equity stakes than I'm recommending. 

The Role of Cash
You'll also notice that I didn't include cash in these portfolios, largely because that's an individual decision based on the size of your portfolio and your living expenses. In general, retirees should hold two to five years' worth of living expenses in cash. (Given paltry cash yields, you may want to keep your cash stake at the low end of this range and park additional assets that you'd like to keep safe in a high-quality short-term bond fund such as  Vanguard Short-Term Bond Index   or  T. Rowe Price Short-Term Bond 

Holding
 
Allocation %
Harbor Bond 
 
25
Harbor Real Return 
 
15
T. Rowe Price Short-Term Bond 
 
8
Harbor Commodity Real Return 
 
6
Selected American 
 
11
Harbor International 
 
10
Primecap Odyssey Growth 
 
5
Vanguard Total Stock Market Index 
 
10
Loomis Sayles Bond 
 
5
Masters' Select Smaller Companies 
 
5
Total
 
100

This portfolio is geared toward retired investors with moderate risk tolerances and life expectancies of 15 years or so. Its target is roughly 55% in bonds and cash, with the remainder in stocks and commodities. (The conservative version of this portfolio holds 70% in cash and bonds.) Roughly a fourth of the moderate portfolio's fixed-income weighting is in Treasury Inflation-Protected Securities, and, like last week's Conservative portfolio, it also includes a slice of commodities exposure.

This portfolio has many holdings in common with last week's conservative portfolio. I've used  Selected American  here instead of  Dodge & Cox Stock , but the two funds fulfill similar roles in their respective portfolios; more risk-tolerant investors might also consider  Oakmark Select ,  Longleaf Partners , or  Clipper Fund .

This portfolio also includes  Primecap Oddysey Growth . (The Primecap team also runs  Vanguard Primecap   and  Primecap Core , both of which are closed to new investors but may appear in many of your portfolios.) Owing to the Primecap team's contrarian approach, their funds can be somewhat volatile on a standalone basis, but fine when combined with value-minded funds like Selected American and  Harbor International .

I've also included  Masters' Select Smaller Companies , which provides a broad shot of small- and mid-cap exposure in a single package. As with all of the portfolios, I've anchored the equity position with a small stake in  Vanguard Total Stock Market Index . Index enthusiasts could match the portfolio's asset allocation but populate it with all index funds instead of the active funds I've mentioned here.

 

 

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