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An Aggressive Model Portfolio for Pre-Retirees

See what we recommend for those with a higher risk capacity.

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My two recent columns featuring model portfolios for conservative and moderate retirees have sparked many thoughtful comments. Some of you have indicated that the portfolios have supplied you with a useful baseline to help benchmark your own in-retirement portfolio, while others have expressed interest in seeing other types of portfolios: all-index, income-focused, or constructed with funds from a single investment platform, to name just a few. 

Several others of you have noted that you have a longer time horizon or a higher risk appetite, making the previous two portfolios too meek for your taste. This week's portfolio is geared toward risk-tolerant new retirees or pre-retirees. Because it's targeting more-aggressive investors, it features 60% in equities and the remainder in bonds and cash. (It also has a small slice of commodities--6%.) Such an asset mix would be most appropriate for a pre-retiree who's expecting to spend many years in retirement and can tolerate substantial fluctuations in part of his or her portfolio; it's also an appropriate mix for an individual who's expecting other income sources during retirement, such as a pension or part-time job.

Here are some factors to bear in mind as you assess these portfolios.

Total Return, Not Income
As with the previous two retiree portfolios, this week's portfolio is focused on providing total return rather than generating 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 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.

Won't Suit All Tastes
As with any model portfolio or one-size-fits-all asset allocation, these portfolios are blunt instruments. Although the time horizons may match your own, your own personal circumstances will dictate whether any of these portfolios are appropriate for you.

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 (VBISX) or  T. Rowe Price Short-Term Bond (PRWBX).

 

Holding Allocation %Metropolitan West Total Ret Bond (MWTRX) 15Longleaf Partners (LLPFX) 10Osterweis (OSTFX) 10Primecap Odyssey Growth (POGRX) 10Vanguard Total Stock Market Index (VTSMX) 10Harbor International Growth (HAIGX) 7.5Dodge & Cox International (DODFX) 7.5T. Rowe Price Small Cap Stock (OTCFX) 8Loomis, Sayles Bond (LSBRX) 5T. Rowe Price Short-Term Bd (PRWBX) 4Harbor Commodity Real Ret (HACMX) 6Harbor Real Return (HARRX) 7Total 100

 

Investment Specifics
This portfolio has much in common with the other two portfolios on the fixed-income side, in particular.  Metropolitan West Total Return Bond (MWTRX) is the core fixed-income holding, but  Harbor Bond (HABDX) or  PIMCO Total Return (PTTRX) are fine substitutes. An index fund tracking Barclays Capital U.S. Aggregate Bond Index, such as  Vanguard Total Bond Market Index (VBMFX), could also work as a component of the portfolio's core fixed-income position, but I'd augment it with a high-quality corporate fund such as  Vanguard Intermediate-Term Investment-Grade (VFICX). This portfolio gets its Treasury Inflation Protected Securities exposure via  Harbor Real Return (HARRX), but  Vanguard Inflation-Protected Securities (VIPSX) or  iShares Barclays TIPS Bond (TIP) are also good choices.

The more aggressive portfolio's equity sleeve features a few holdings that don't appear in the other portfolios. Because the foreign-stock portion of the portfolio is larger, I've included two separate holdings:  Dodge & Cox International Stock  (DODFX) for foreign value exposure and  Harbor International Growth (HIIGX) for growth. ( Harbor International (HIINX), which I've included in the conservative and moderate portfolios, would be a worthwhile substitute for the Dodge & Cox fund, whereas  Artisan International (ARTIX) would work well as a substitute in the Harbor International Growth slot.) More-intrepid investors at this life stage might also consider a small stake in an emerging-markets or foreign small-cap fund, though that would increase the portfolio's risk level and may be redundant with any core foreign funds that appear in the portfolio.

I've also included a 10% stake in  Longleaf Partners (LLPFX), another fund that can be volatile by itself but works well in the context of a broadly diversified portfolio. In addition, one of my favorite go-anywhere funds appears in this portfolio:  Osterweis (OSTFX). Not only does this fund invest in companies of all sizes, but it also moves into bonds when opportunities beckon and holds cash when nothing looks cheap. I like its opportunistic yet cautious approach.

Performance Update
Because this portfolio includes a few aggressive funds, I'm not surprised to see that its performance has diverged more from its blended benchmark than did my conservative or moderate portfolios. (By "blended" benchmark, I mean that I created a separate portfolio composed of index funds and exchange-traded funds to mirror this portfolio's asset allocation for tracking purposes.) This portfolio returned 7.95% in the one-year period from early September 2009 to early September of this year, whereas the benchmark returned 6.09% during that same stretch.

Metropolitan West Total Return Bond has done yeoman's work as the portfolio's core fixed-income holding, outpacing our fixed-income benchmark Vanguard Total Bond Market Index, which itself is a respectable core fixed-income holding, by a huge margin during the past year. This portfolio's largest equity holdings, meanwhile, have also performed extremely well. Longleaf Partners has crushed its total stock market index benchmark as a result of its always-eclectic basket of individual picks, and Osterweis has also thrived. This portfolio isn't designed for a period of many years, however. Owing to these funds' truly active strategies, I fully expect that there will be periods in which they badly underperform their peers, but I think they'll be solid holdings for those with appropriately long time horizons.  

A version of this article appeared Oct. 1, 2009.

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Christine Benz has a position in the following securities mentioned above: OTCFX. Find out about Morningstar’s editorial policies.