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3 Stock Funds for Retirees

Christine Benz
Susan Dziubinski

Susan Dziubinski: I'm Susan Dziubinski for Stocks can play an important role in the portfolios of retirees. After all, if you are going to live off your portfolio for two decades or more, you will likely need stocks to provide some much needed growth during the drawdown phase. Morningstar's director of personal finance Christine Benz includes three stock funds in her model portfolios for retirees. She is here today to discuss them.

Christine, thanks for joining me.

Christine Benz: Susan, it's great to be here.

Dziubinski: Your retirement portfolios include stock funds in that third and last bucket. The stock fund that takes up the largest percentage of assets is Vanguard Dividend Appreciation. Why did you pick that fund?

Benz: I think of it as sort of a high-quality subset of the total market. It focuses on companies that have increased their dividends in each of the past 10 years, and the net effect of that screen is that it tends to focus on companies with sustainable competitive advantages. When we look at the portfolio, it actually has a much larger share in what we call wide-moat stocks than does the S&P 500. It's also a Vanguard index fund. It's very, very inexpensive. It charges just 8 basis points for the admiral shares. It's a cost-effective way to own what I think of as a very high-quality portfolio. It tends to be less volatile than the broad market. In 2008, it lost 10 percentage points less than the S&P 500.

Dziubinski: You also include another Vanguard index fund, Vanguard Total Stock Market, in the portfolio. How does that come into play with the mix?

Benz: It comes into play because there are sectors of the market that that Vanguard Dividend Appreciation does not encompass. Vanguard Dividend Appreciation tends to be pretty light on the technology sector, for example. Vanguard Total Stock Market, of course, just mimics the total market capitalization of the U.S. stock market. It's not making bets on various sectors. It offers very broad-based market exposure. It's even cheaper than Vanguard Dividend Appreciation; it charges just 4 basis points for the admiral share class and it's also incredibly tax-efficient. For an investor who has a taxable component of his or her retirement portfolio, this can be a one and done choice because it is very tax-efficient. It comes either as an exchange-traded fund or a traditional index fund.

Dziubinski: Harbor International is the third fund. Why that one in particular?

Benz: This is a little more controversial, I suppose. It's certainly more volatile and it has tended to be a little bit streaky when we look at performance. It has some periods of very strong returns, but periods where returns haven't looked as good. But I think it's a great fund, because I believe that its strategy is fundamentally really prudent. Management focuses on companies that it believes have sustainable competitive advantages. It likes to buy them when it thinks they are trading cheaply. Once it buys them, it hangs on and on and on. It has very low turnover, it's a patient approach. I would say, investors who like the idea of that strategy, need to have a similarly patient mindset because it will go through these fallow periods where performance will look out of sync with other foreign stock funds.

Dziubinski: Christine, thanks so much for providing us some perspective on these funds today.

Benz: Thank you, Susan.

Dziubinski: Thanks for watching. I'm Susan Dziubinski for