This mild portfolio is geared toward conservative investors with 10-year time horizons.
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By Christine Benz | 09-09-10 | 06:00 AM | Email Article

"What about those of us who are already retired? Can you please write more about our issues and concerns?"

I've received many e-mails like that since I began focusing on personal finance a few years back, and those readers have a good point. The concerns of investors who are almost or already retired are quite different from those of us who are still working.

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.

Hearing from such users prompted me to create retiree portfolios for individuals at various life stages and with varying risk capacities. I rolled out these portfolios a year ago, in the fall of 2009, and wanted to revisit them and provide an update on how they've performed. I'm also happy to report that I like these portfolios as much today as I did a year ago.

This week's portfolio is geared toward a very conservative retired investor with a time horizon of approximately 10 years. By 10-year time horizon, I mean that it's appropriate for an individual with a life expectancy of roughly 10 years. Of course, individuals at any life stage vary greatly. Wealthier seniors may have a big share of their portfolios in growth-oriented assets that they'd like to leave behind for their children and grandchildren, while other seniors are focusing mainly on income and stability because they're drawing heavily on their portfolios for living expenses.

This portfolio is geared toward the latter type of retiree, and as such, its goal is to deliver a modest return with a limited level of volatility. Note that its focus is on total return rather than current income (that is, 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 (or have a bundle of money) to generate a livable income stream at this point.

Model Portfolio for Conservative Retirees: 10-Year Time Horizon

Holding
Allocation (%)
Harbor Bond 
 
25
Harbor Real Return 
 
22
T. Rowe Price Short-Term Bond 
 
12
Harbor Commodity Real Return 
 
6
Dodge & Cox Stock 
 
5
Dreyfus Appreciation 
 
5
Harbor International 
 
5
Loomis Sayles Bond 
 
5
Royce Total Return 
 
5
Vanguard GNMA 
 
5
Vanguard Total Stock Market Index 
 
5

 

Asset Allocation
Because capital preservation and stability are likely to be key goals for retirees at this life stage, this portfolio stakes roughly 70% of its assets in bonds and cash and the remainder in stocks. This conservative portfolio's emphasis on inflation protection is also notable: Roughly one third of the bond position is in inflation-protected securities, and another 6% of the total portfolio is parked in commodities. That's because as you add fixed-rate investments like bonds and bond funds to your portfolio, inflation will gobble up more and more of your purchasing power. (Although inflation is currently under control, Morningstar's economic team thinks it's a substantial concern for the future.)

Note that this portfolio does not include a dedicated allocation to cash to cover near-term living expenses, as the size of any such an allocation would be highly individual-specific. A good rule of thumb is for retirees to hold at least two years' worth of living expenses in highly liquid assets such as certificates of deposit and money market funds.

Even though the equity portion of this very conservative portfolio is fairly small, at just 25% of assets, it's still well-diversified by investment style and includes exposure to growth, foreign, and even small-cap stocks. These areas are often considered more risky than U.S. large-cap value names, but they're fine as part of a well-diversified mix.

Investment Specifics
Although a well-diversified income-oriented portfolio should include bonds of varying maturities, you needn't buy dedicated short-, intermediate-, and long-term holdings. Instead, the linchpin of the portfolio shown here is a flexible core bond fund that I've recommended many times in the past:  Harbor Bond , run by Bill Gross at PIMCO. I'm also a fan of  Metropolitan West Total Return Bond , which fills a similar, utility-player role; a core index fund such as  Vanguard Total Bond Market Index  would also be reasonable. Retirees in higher tax brackets, meanwhile, may want to investigate municipal bonds for the taxable component of their portfolios; Fidelity and Vanguard's muni lineups are tough to beat. 

For shorter-term exposure, I like Fund Analyst Pick  T. Rowe Price Short-Term Bond , which focuses on high-quality corporates and has generally done a good job at limiting losses. I didn't put a dedicated long-term bond fund into the portfolio, largely because such funds' long-term returns are similar to what you'd earn from an intermediate-term fund, but the volatility has been extreme. I've recommended another PIMCO-managed Harbor fund for exposure to Treasury Inflation-Protected Securities,  Harbor Real Return . ( Vanguard Inflation-Protected Securities  and  iShares Barclays TIPS Bond , an exchange-traded fund, are worthy plain-vanilla substitutes.)  Loomis Sayles Bond  provides exposure to corporate bonds, including some lower-rated debt as well as smaller slices of foreign government debt, including emerging markets.

On the equity side, I've included  Dodge & Cox Stock , which remains a high-conviction pick for Morningstar despite its steep losses in 2008. I've also included a lesser-known fund,  Dreyfus Appreciation , which I've often recommended for retiree portfolios. Due to its focus on blue-chip firms with sustainable competitive advantages, the fund has managed to deliver strong long-term returns with low volatility.  Sequoia ,  Jensen Portfolio , and  Vanguard Dividend Appreciation  would all be solid alternatives to the Dreyfus fund.  Royce Total Return  provides exposure to a broad basket of small- and mid-cap stocks, and Chuck Royce's focus on dividend payers has helped limit risk.

Performance Update
Since I originally featured this portfolio on Morningstar.com a year ago, I'm happy to say that its performance has delivered on my expectations, generating a modest return with a limited level of volatility. The portfolio has returned roughly 6% from early September 2009 through early September of this year, outpacing a blended benchmark of inexpensive index funds and ETFs by 0.66% during that stretch. (By "blended" benchmark, I mean that I replicated the portfolio's asset-class exposure by creating a portfolio composed of inexpensive index funds.)

The portfolio's core bond holdings, Harbor Bond and Harbor Real Return, added a lot, outpacing our bond benchmark Vanguard Total Bond Market Index by more than 2 percentage points during the past year. Loomis Sayles Bond, albeit a smaller position, also pitched in strong gains, helping offset muted returns from T. Rowe Price Short-Term Bond and  Vanguard GNMA  . The latter two funds are in the portfolio more for their stability and risk aversion than they are for their return potential; I don't expect them to shoot out the lights in any time period.

On the equity side, Dodge & Cox Stock was our portfolio's weakest performer, dragged down by  Hewlett-Packard's  recent travails. The portfolio's stakes in Dreyfus Appreciation and Royce Total Return, meanwhile, made relatively strong contributions to the portfolio's bottom line.

A version of this article originally appeared Sept. 17, 2009. 

See More Articles by Christine Benz


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