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An Aggressive Retirement Saver Portfolio

We employ actively managed mutual funds and a stock-heavy portfolio mix.

“I’m 15 years from retirement. Should I be splitting my portfolio into buckets?”

I've received several variations of that question in response to my Model Bucket Portfolios. My answer, in short, is that the Bucket Approach--essentially segmenting a portfolio by time horizon--is most useful for retirement planning. Not only does an in-retirement Bucket Portfolio provide ready cash reserves if the long-term components of the portfolio are at a low ebb (and, therefore, not good candidates for selling) but in better market environments, it also facilitates easy rebalancing to shake off income for living expenses. By contrast, a bucketed portfolio will tend to be less useful for accumulators, who are relying on their salaries, rather than their portfolios, to meet their day-to-day cash needs.

That said, time-horizon considerations should be a key aspect of portfolio planning for accumulators, too. Given that the S&P 500 has had a positive return in rolling 10-year periods more than 90% of the time, people who won't need to tap their portfolios for another decade can reasonably steer the majority of their portfolios into stocks. Of target-date funds geared toward people retiring in the year 2025, for example, the average equity allocation is about 55%. The typical equity allocation among target-date funds geared toward 2055 retirees is roughly 85%.

In addition to tilting their portfolios heavily toward stocks, people with many years until retirement can also reasonably hold more in potentially more volatile subasset classes, such as small-cap stocks and foreign stocks and bonds, than individuals with shorter time horizons. With less concern for short-term portfolio gyrations, they can benefit from the extra diversification and potentially higher returns that these subasset classes can provide.

Saver Portfolios for Varying Time Horizons, Management Preferences With those considerations in mind, I've created a series of Model Portfolios geared toward still-working people who are building up their retirement nest eggs. I've used Morningstar's Lifetime Allocation Indexes to inform the portfolios' asset allocations and the exposures to subasset classes. To populate the portfolios, I employed no-load, open funds that received medalist ratings from Morningstar's analyst team. Most of the funds earned Gold ratings, though I've used Silver- and Bronze-rated funds in cases when suitable Gold-rated, no-load options that are accepting new investments are unavailable.

Portfolio Basics

The Aggressive Retirement Saver mutual fund portfolio's weightings are as follows:

  • 20%: Primecap Odyssey Growth POGRX
  • 20%: Oakmark Fund OAKMX
  • 15%: Vanguard Extended Market Index VEXAX
  • 33%: Vanguard Total International Stock Index VTIAX
  • 7%: Oakmark International Small Cap Investor OAKEX
  • 5%: Metropolitan West Total Return Bond MWTRX

The Aggressive Retirement Saver mutual fund portfolio uses the allocations of Morningstar's Lifetime Allocation 2055 Aggressive Index to guide its weightings. That index devotes more than 90% of its assets to stocks, meaning that anyone considering such a portfolio should not only have a long time horizon but should also be able to tolerate the volatility that can accompany a very high equity allocation.

That said, such a portfolio could also make sense for investors with shorter time horizons until retirement but ample income coverage in retirement. For example, the person who intends to retire in 2020 with in-retirement income needs covered entirely by a pension might reasonably consider a similarly aggressive asset allocation.

Rather than employing separate holdings for large-cap value, blend, and growth stocks, the portfolio employs two large-cap holdings: Oakmark Fund, which employs a value-leaning strategy but lands in Morningstar's large-blend category, and Primecap Odyssey Growth for growth exposure.

The portfolio tilts more heavily toward small- and mid-cap stocks than is the case with a broad market index fund. It also stakes more than a third of equity assets in foreign-stock funds: a broadly diversified large-cap offering as well as one devoted to small- and mid-caps overseas, Oakmark International Small Cap.

Due to all of these characteristics--a slight tilt toward small- and mid-caps and a large foreign-stock weighting--the portfolio has an aggressive cast.

How to Use As with the Bucket Retirement Portfolios, my key goal here is to depict sound asset-allocation and portfolio-management principles rather than to shoot out the lights with performance. That means that investors with very long time horizons and/or very high risk capacities could use it to help size up their own portfolios' asset allocations and sub-allocations. Alternatively, investors can use the portfolio as a source of ideas in building out their own portfolios. As with the bucket portfolios, I'll employ a strategic (that is, long-term and hands-off) approach to asset allocation; I'll make changes to the holdings only when individual holdings encounter fundamental problems or changes.

Nearly all portfolios for investors in accumulation mode will be stock-heavy, because longer time horizons mean these investors have time to ride out bad markets. This aggressive portfolio will be especially sensitive to stock market movements. It may likely lose more than the broad market in sell-offs. Investors need to be prepared to stick with it in those tough times or risk losing the longer-term benefits.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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