This mild portfolio is geared toward conservative investors with 10-year time horizons.
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By Christine Benz | 09-17-09 | 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. I'll be focusing more on retirement-related content in the months ahead, and I welcome your input on what topics to cover.

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.

In this week's column, I'll feature a sample portfolio for a very conservative retired investor with an approximately 10-year time horizon. (In future columns, I'll discuss sample portfolios for retirees at other life stages.)

This portfolio's 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 (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 (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 a 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. (While inflation is currently under control, Morningstar's economic team thinks it's a substantial concern for the future.)

Note that the equity portion of this very conservative portfolio is well diversified by investment style and includes exposure to growth, foreign, and 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.)

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 their 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 ETF, are worthy 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. Thanks 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  and  Jensen Portfolio , as well as  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.

 

 

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Morningstar - 2009/09/17 - A Conservative Model Portfolio for Retirees - <a href="http://www.morningstar.com/articles/author/30-christine-benz.aspx">Christine Benz</a>
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