How Our Vanguard Retirement Saver Portfolios Have Performed
In a rising equity market, core U.S. positions have given the most aggressive portfolios the biggest boost.
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The timing of the launch of my model portfolios, including three Vanguard portfolios for people saving for retirement, was less than auspicious. Following China's "Black Monday" in 2015, global markets plunged, leading to steep losses in August and September of that year.
Further clouding stocks' prospects was that equities had already rallied for seven years at that point. While equity valuations didn't seem excessively high, nor was there a clear catalyst for further gains. If I had had to hazard a guess about what they might return over the next three years, I'd have suggested checking your expectations.
But stocks have absolutely defied the naysayers over the past three years, with the S&P 500 turning in high double-digit gains on an annualized basis over the period. And thanks to that strength, all of my equity-heavy Retirement Saver Portfolios, including those from Vanguard, have generated double-digit gains.
Now that the portfolios have years' worth of history under their belts, it's a good time to check up on their holdings and their performance.
As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these Vanguard portfolios. To help populate the portfolios with specific funds and monitor them on an ongoing basis, I leaned on Morningstar's Medalist ratings and input from Morningstar's analyst team. Vanguard fields more medalist funds than any other firm, so finding suitable choices wasn't a heavy lift. The portfolios are designed for tax-deferred accounts like IRAs, so they include tax-inefficient assets like dividend-paying stocks and inflation-protected bonds.
Investors might naturally assume that their proximity to retirement should determine whether they invest in the Aggressive, Moderate, or Conservative portfolios, and that's definitely a key swing factor. But investors should also take into account risk capacity and the presence of other income sources they'll be able to rely on during retirement. To use a simple example, a 55-year-old investor who doesn't get flustered by short-term volatility and has a pension that will provide all of her in-retirement income needs could reasonably employ the Moderate or even Aggressive versions. Meanwhile, a 30-year-old who's nervous about short-term losses might employ the Moderate portfolio, even though his time horizon is long enough to support a higher equity weighting.
Aggressive Retirement Saver Portfolio for Vanguard Investors
30%: Vanguard Total Stock Market Index (VTSMX)
10%: Vanguard Equity-Income (VEIPX)
10%: Vanguard Selected Value (VASVX)
5%: Vanguard Mid Cap Growth (VMGRX)
5%: Vanguard Small Cap Value Index (VISVX)
20%: Vanguard International Growth (VWILX)
15%: Vanguard International Value (VTRIX)
5%: Vanguard Total Bond Market Index (VBMFX)
3-Year Annualized Return: 13.42%
With 95% of its assets in equities, the Aggressive portfolio notched the highest gains of the three Vanguard Retirement Saver portfolios. Somewhat surprisingly, given that U.S. stocks outperformed foreign over the past three years, Vanguard International Growth was the best performer in the portfolio. Its growth tilt helped, as did its complement of stocks domiciled in the U.S. The next-best performer was Total Stock Market Index, which outperformed all of the other U.S. stock holdings. (Vanguard Equity Income was a close second.)
None, though it's worth noting that Vanguard Mid Cap Growth experienced a management change in December 2016. The firm replaced Chartwell Investment Partners with RS Investments, so now RS is running half of the portfolio and William Blair is managing the other half. The fund held onto its Bronze rating holding despite the change, however, so I retained it in the portfolio. William Blair has been running a portion of the portfolio since 2006, and Morningstar's analysts think highly of the RS team and process.
Moderate Retirement Saver Portfolio for Vanguard Investors
30%: Vanguard Total Stock Market Index
10%: Vanguard Equity Income
10%: Vanguard Selected Value
5%: Vanguard Mid Cap Growth
5%: Vanguard Small Cap Value Index
15%: Vanguard International Growth
10%: Vanguard International Value
12%: Vanguard Total Bond Market Index
3%: Vanguard Total International Bond Market Index (VTIBX)
3-Year Annualized Return: 12.35%
Although this portfolio has an equity stake that's 10 percentage points less than its Aggressive counterpart, the Aggressive portfolio has a higher weighting in international stocks, which have underperformed. Thus, the Moderate portfolio has nearly kept pace with the Aggressive one over the past three years.
Note that this portfolio, in contrast to the Aggressive one, includes a small position in Vanguard's hedged international bond index fund, which has outperformed Vanguard Total Bond Market Index over the past three years.
Conservative Retirement Saver Portfolio for Vanguard Investors
25%: Vanguard Total Stock Market Index
10%: Vanguard Equity Income
5%: Vanguard Small Cap Value Index
10%: Vanguard International Growth
5%: Vanguard International Value
23%: Vanguard Total Bond Market Index
7%: Vanguard Short-Term Bond Index (VBISX)
9%: Vanguard Inflation-Protected Securities (VIPSX)
6%: Vanguard Total International Bond Market Index
3-Year Annualized Return: 9.07%
With just 55% of its assets in stocks, this portfolio's returns were meaningfully below those of its more equity-heavy Aggressive and Moderate counterparts. It helped that its position in Total Stock Market was larger, as a percentage of total equity assets, than the more equity-heavy portfolios.
Because this portfolio is geared toward savers who are just five years from retirement, its bond stake is not just larger but it's also more diffuse than is the case with the Moderate and Aggressive portfolios. Those additional positions were a mixed bag. With the bond market rewarding risk-taking, Vanguard Short-Term Bond's three-year results were muted, but it's in place to supply stability should the intermediate-term bond fund encounter interest-rate-related or other volatility. The inflation-protected bond and international bond funds both outperformed the Total Bond Market Index over the three-year period.
Christine Benz has a position in the following securities mentioned above: VWILX, VTRIX. Find out about Morningstar’s editorial policies.
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