These portfolios are composed exclusively of funds on offer from the Boston giant.
By Christine Benz | 09-14-15 | 06:00 AM | Email Article

My model "bucket" portfolios are composed of funds that our analysts consider best of breed. But they also assume that investors don't mind running hither and thither to put together their portfolios--a Vanguard fund here, a Harbor fund there, and a Fidelity fund thrown in for good measure.

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.

But rather than assembling a portfolio of "onesies," many investors would prefer to deal with as few investment providers as possible. Of course, most of the big providers allow investors to buy funds from other firms on their platforms without paying any additional transaction fees, but those no-transaction-fee fund menus don't include everything. A Vanguard investor will pay a transaction fee to buy a Fidelity fund, for example, and T. Rowe Price investors will have to pay transaction fees to buy Vanguard funds on the T. Rowe platform.

In recognition of the fact that some investors would prefer to do business with a single fund family and stick with the "house brand" of mutual funds, I'll be rolling out fund-family-specific model bucket portfolios over the next few weeks. Bucket portfolios composed exclusively of Fidelity funds will kick things off. These portfolios--geared toward retirees with varying time horizons/life expectancies--are best for investors in tax-deferred accounts such as IRAs. 

Bucket Basics
Before we get into the specifics, let's review the basic concept of bucket retirement portfolios, pioneered by financial-planning guru Harold Evensky. The central premise is that the retiree holds a cash bucket alongside his or her long-term assets, both stocks and bonds. If the long-term components of the portfolio, especially stocks, hit a rough patch, the cash bucket ensures that the retiree has enough liquid assets to use for living expenses. That cash cushion helps ensure that the retiree doesn't have to sell any long-term assets when they're at a low ebb and also provides valuable peace of mind. But the cash also drags on performance in an upward-trending market, which is one reason that retirees should limit the cash bucket to one to two years' worth of living expenses, at most.

I've used Morningstar's Lifetime Allocation Indexes to guide the portfolios' long-term asset allocations and employed  Morningstar Medalist funds, as well as the insights of our analysts, to help populate them. The portfolios are designed to be strategic--that is, they're meant to be bought, held, and rebalanced--rather than tactical. I'll make changes only when there's a meaningful negative development in one of our holdings, or if another investment that I like better becomes available. In short, I expect to make very few changes to these portfolios over time, because many retirees don't want to have to make frequent trades in their portfolios, either.

It's also worth noting that the goal of the portfolios isn't to outperform every other retirement portfolio or strategy ever devised. Rather, the objective is to illustrate sound portfolio-construction and cash-flow-generation principles--particularly important given the very low yields available in the market today. Nor do retirees need to completely upend their portfolios in order to implement a similar bucket strategy. Assuming they have solid core building blocks--both stock and bond holdings--they have most of the raw ingredients needed for a bucket portfolio.

Aggressive Bucket Portfolio
Anticipated Time Horizon: 25 or more years

Bucket 1: Years 1-2
8%: Cash (certificates of deposit, money market accounts, and so forth; percentages will vary based on amount of assets and spending rate)

The goal of this portion of the portfolio is to provide money for cash needs in years one and two of retirement. The size of this bucket--in both percentage and dollar terms--will vary depending on the retiree's income needs and total assets. For example, a retiree with a $1 million portfolio who's withdrawing just $30,000 a year from her portfolio would have only 6% ($60,000) of her portfolio in cash (her $30,000 annual living expenses times two years).

Bucket 2: Years 3-10
7%:  Fidelity Short-Term Bond
20%:  Fidelity Total Bond
10%:  Fidelity Strategic Real Return

This portion of the portfolio steps out on the risk spectrum from bucket one. Fidelity Short-Term Bond, which is also a holding in my actively managed bucket portfolios, can serve as next-line reserves if bucket one is depleted and the portfolio's longer-term stock and/or bond holdings are depressed. While it suffered a blowup in 2008, its new managers have given it a risk-conscious makeover. The Gold-rated Fidelity Total Bond is the portfolio's largest fixed-income position. Senior analyst Sarah Bush lauds it for its flexibility, experienced management, and deep resources; Fidelity's corporate-credit team consists of 30-plus analysts and other researchers. Meanwhile, Fidelity Strategic Real Return is in place to deliver one-stop inflation protection, including slugs of Treasury Inflation-Protected Securities, floating-rate loans, real estate investments, and commodity-linked notes. Recent performance has been tepid; with inflation low, demand for inflation-protective investments has been limited. But the goal is to put down inflation protection before it's actually apparent and the prices of inflation-protective instruments get bid up. I like that the fund eliminates the need for a lot of smaller holdings, including bank loans and commodities.

Bucket 3: Years 11 and Beyond
20%:  Fidelity Large Cap Stock
10%:  Fidelity Spartan Total Market Index Advantage
15%:  Fidelity International Discovery
10%:  Fidelity Strategic Income

Primarily invested in stock funds, bucket three is the growth engine of the portfolio. It's anchored by two large-cap domestic-equity funds, Silver-rated Fidelity Large Cap Stock and Gold-rated Fidelity Spartan Total Market Index. Senior analyst Katie Reichart considers the former to be one of the firm's best actively managed funds.  Fidelity Contrafund is also on her short list (and is also rated Silver), but she's concerned that ongoing redemptions, plus the fund's sizable embedded capital gains exposure, could translate into unwanted capital gains distributions. (That shouldn't be a concern for investors who own the fund in a tax-sheltered account like an IRA or 401(k).) Index enthusiasts or investors in taxable accounts could simply use Fidelity Spartan Total Market Index for their entire U.S. stock exposure.

Fidelity International Discovery provides foreign-stock exposure, including a stake in emerging markets. Here, again, index believers and/or tax-conscious investors could go with Fidelity's excellent Spartan index funds.

Fidelity Strategic Income divides itself between junkier, high-risk bonds (including emerging markets) and high-quality credits; but overall, it's aggressive. Thus, its best home is as part of bucket three--the idea being that investors in such products should have suitably long time horizons.

Moderate Bucket Portfolio
Anticipated Time Horizon: 20 years
This portfolio contains the same holdings as the aggressive Fidelity portfolio, differing only in its allocations to them. Its cash stake is the same, but because it's geared toward retirees with shorter time horizons, it includes larger positions in high-quality short- and intermediate-term bonds and smaller positions in equities.

Bucket 1: Years 1-2
8%: Cash (certificates of deposit, money market accounts, and so forth; percentages will vary based on amount of assets and spending rate)

Bucket 2: Years 3-10
7%: Fidelity Short-Term Bond
25%: Fidelity Total Bond
15%: Fidelity Strategic Real Return

Bucket 3: Years 11 and Beyond
15%: Fidelity Large Cap Stock
10%: Fidelity Spartan Total Market Index Advantage
10%: Fidelity International Discovery
10%: Fidelity Strategic Income

Conservative Bucket Portfolio
Anticipated Time Horizon: 15 years
In contrast with the aggressive and moderate portfolios, both of which emphasize growth to varying extents, this portfolio is geared toward older retirees with shorter time horizons. As such, its focus is on preserving purchasing power and funding living expenses; capital appreciation is secondary. Because its growth prospects are relatively low, it would not be appropriate for younger retirees unless they are extremely risk-averse and--more importantly--have more than enough money to last throughout their retirement years.

Bucket 1: Years 1-2
8%: Cash (certificates of deposit, money market accounts, and so forth; percentages will vary based on amount of assets and spending rate)

Bucket 2: Years 3-10
12%: Fidelity Short-Term Bond
30%: Fidelity Total Bond
15%: Fidelity Strategic Real Return

Bucket 3: Years 11 and Beyond
15%: Fidelity Large Cap Stock
10%: Fidelity Spartan Total Market Index Advantage
5%: Fidelity International Discovery
5%: Fidelity Strategic Income

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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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