This portfolio is geared toward retirees with a 20-year time horizon and moderate risk tolerance.
By Christine Benz | 01-26-18 | 12:00 AM | Email Article

Bucket 1: Years 1-2

  • 10%: Cash (certificates of deposit, money market funds, and so on)

The goal of this portion of the portfolio is to lock down money needed for near-term living expenses; income production is secondary. Therefore, it holds true cash instruments rather than venturing into investments such as ultrashort funds, which may at times deliver higher yields but do so at the expense of principal volatility. Rather than arbitrarily holding 10% cash, investors should look to their own portfolio withdrawals to determine how large their cash positions should be. Holding two years' worth of cash-flow needs in cash is a reasonable benchmark.

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.

Bucket 2: Years 3-10

Bucket 2 is designed to deliver a higher level of income than Bucket 1; it also aims to preserve purchasing power with a dash of capital appreciation. The risk level in this portfolio stair-steps gradually upward. The Fidelity Short-Term Bond fund would serve as next-line reserves in case bucket one were to become depleted and rebalancing proceeds and/or portfolio income were insufficient to meet living expenses. I've also included a slice of a floating-rate, or bank-loan, fund. This Fidelity fund, while potentially sensitive to the credit cycle, should hold its ground and even gain in a period of rising interest rates. Harbor Bond, a near-clone of  PIMCO Total Return , remains the portfolio's largest bond holding.

Because this portion of the portfolio has a longer time horizon, inflation protection is a concern. Vanguard Short-Term Inflation-Protected Securities delivers inflation protection without a lot of interest-rate-related volatility. Investors could also use individual I Bonds in this slot, too. Note that I gave this position a slight boost, as of late 2017; I've outlined the details behind this decision below.

A position in Vanguard Wellesley Income, which features a roughly 60% bond/40% stock allocation, is the longest-term component of the portfolio, providing both income and a shot of capital appreciation. 

Bucket 3: Years 11 and Beyond

The long-term portion of the portfolio, geared toward growth, generally mirrors Bucket 3 of the aggressive portfolio. It includes a high-quality equity emphasis with its position in Vanguard Dividend Appreciation, but it also features broad-ranging sector exposure owing to the total market U.S. index fund. (The original version of this portfolio featured  Vanguard Dividend Growth  in lieu of Vanguard Dividend Appreciation, but the former closed to new investors in July 2016. Vanguard Dividend Growth is a fine option for those who got in before the closure.) Harbor International features experienced managers who employ a disciplined process, though it recently experienced an analyst rating downgrade, from Gold to Silver, I'm retaining it in these portfolios. I also continue to like Loomis Sayles Bond for the long term. Although I've been concerned about investors' stampede into aggressive, credit-sensitive bond types, Loomis' flexibility to invest in foreign bonds, convertibles, and even stocks is an advantage. Just be sure to hold any such fund among your longest-term assets rather than in Bucket 2. 

One major change, however, is that with Harbor's recent announcement to liquidate its Commodity Real Return Fund , I decided to not replace it with another commodities option. 

The fund has performed poorly, to be sure, but that wasn't the main factor in my decision. (If anything, its poor performance made me tempted to hang on, as poor-performing categories inevitably have their day.) Rather, I found a dearth of decent, low-cost alternatives available to no-load commodities investors. Two commodity funds,  PIMCO Commodity Real Return  and  PIMCO CommoditiesPLUS Strategy , earn Medalist ratings currently. But while the institutional share classes charge a not unreasonable 0.74% per year, neither fund is accessible at a reasonable price without a load through fund supermarkets. (The D shares that are available levy a 1.19% expense ratio, setting up a high hurdle.)

My decision was also influenced by Morningstar Investment Management's 2016 move to reduce commodities in Morningstar's Lifetime Allocation Indexes; I look to those indexes to help determine the portfolios' allocations. In this video, senior portfolio manager Brian Huckstep noted that a phenomenon called negative roll yield has been a significant headwind for commodities futures funds. The indexes didn't cut commodities altogether--most hold roughly 2% positions. But my goal for these portfolios is to limit complexity, and maintaining a 2% position in a niche asset class doesn't jibe with that goal. I steered the 5% of assets that had previously been earmarked for commodities into Vanguard Short-Term Inflation-Protected Securities. That brings the portfolio's weightings in inflation-protected bonds more closely in line with the indexes' TIPS weightings. Moreover, one of the original goals of the commodities exposure was to provide inflation protection, and TIPS fulfill that role, too.

Securities mentioned in this article



Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners