Model Retirement-Saver Portfolios for Vanguard Investors
Sample allocations and holdings for aggressive, moderate, and conservative accumulators.
Vanguard is easy to recommend as a destination for investors aiming to simplify their financial lives by investing with a single firm. Morningstar's analyst team gives the firm an A rating for stewardship, owing to its strong corporate culture and ultra-low-cost products. It also fields the largest number of Morningstar Medalist funds of any fund firm. (As of mid-August 2015, 78 of the firm's funds garnered Morningstar Analyst Ratings of Bronze or better.)
If anything, the biggest challenge for investors who are already sold on what Vanguard has to offer is winnowing down the firm's standout lineup into a reasonably compact portfolio. One way for retirement savers to do so is to buy one of the firm's target-date funds; the funds in the series receive Gold ratings--one of only two target-date lineups to do so. Alternatively, it's hard to find fault with the "three-fund portfolio" espoused by many Bogleheads. (For the uninitiated, Bogleheads are true believers in the low-cost, index-centric investment philosophy of Vanguard founder Jack Bogle.)
For investors who would like more nuance in their portfolios--for example, the chance to own some of the firm's standout actively managed funds or Treasury Inflation-Protected Securities, which
As with the other model portfolios, I've used the weightings of
to guide the portfolios' baseline allocations. To populate the portfolios, I leaned on
and input from Morningstar's analyst team. I specified the lowest-minimum share class for these portfolios, but investors who can avail themselves of cheaper share classes with higher minimums should obviously do so.
For each portfolio, I've included an anticipated time horizon--the investor's number of years to retirement. However, as with any off-the-shelf asset-allocation guidance, investors should take into account their own personal situations before implementing these allocations. Investors who are nearing retirement and expect to be able to rely on nonportfolio assets like a pension to fund their in-retirement living expenses may well want a more aggressive allocation than the one featured in the conservative portfolio, for example. Meanwhile, nervous investors who have retreated from equities in times of market stress or who are investing for nearer-term goals as well as retirement may well want to downplay stocks relative to the weightings of the aggressive and moderate portfolios. It's also worth noting that stocks aren't especially cheap right now, so investors who have a substantial amount of money to invest will want to dollar-cost average to avoid buying stocks (or bonds!) at a high point.
Aggressive Vanguard Retirement-Saver Portfolio Anticipated Time Horizon to Retirement: 40 years
5%: Vanguard Total Bond Market Index
This portfolio is anchored by a sizable position in a total stock market index fund that covers the waterfront. (Indexers could reasonably use that fund as their sole U.S. equity position and call it a day.) I've augmented it with some of our analysts' favorite actively managed funds to give the total portfolio a slight tilt toward the value side of the Morningstar Style Box. Vanguard Equity-Income provides active exposure to value stocks; both of its management teams favor firms with above-average dividend yields as well as other attractive characteristics, such as low valuations. Vanguard Selected Value provides exposure to mid-cap value (as well as mid-cap blend) stocks, employing three distinct management teams with different spins on a value-investing strategy. Unfortunately, all of Vanguard's actively managed large-growth-leaning funds are closed to new investors, including the superb Primecap-managed offerings. To keep the portfolio from skewing too heavily toward value stocks, I've also included a position in Vanguard Mid Cap Growth, an actively managed fund. Finally, because the resultant portfolio includes next to nothing in small-value stocks, which have tended to outperform large-cap and growth stocks over long periods of time, I added a slice of dedicated small-cap-value exposure via the firm's index fund.
On the international-equity side, I've employed two fine actively managed funds--Vanguard International Growth and Vanguard International Value--that complement one another well. Here again, an investor could reasonably use a total international-stock fund in lieu of the active offerings.
Because the time horizon for this portfolio is so long, it includes but a tiny slice of fixed-income exposure. And while Morningstar's Lifetime Allocation Indexes call for a small stake in commodities, Vanguard fields no such fund. The closest approximation is the firm's Precious Metals and Mining fund VGPMX, which has historically had a much closer correlation with the equity market than metals' prices. I've steered that position to stocks instead, though investors in search of extra diversification plus, potentially, an inflation hedge, might also consider Vanguard Global ex-US Real Estate Index VGXRX.
Moderate Vanguard Retirement-Saver Portfolio Anticipated Time Horizon to Retirement: 20 years
30%: Vanguard Total Stock Market Index 10%: Vanguard Equity-Income 5%: Vanguard Mid Cap Growth 10%: Vanguard Selected Value 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
Even though it's geared toward an investor in his or her 40s--with a 20-year time horizon--this portfolio is also stock-heavy, with an 85% allocation to U.S. and foreign stocks. The key variance with the aggressive portfolio is that this one is lighter on foreign stocks and has a slightly heavier fixed-income position, including a small allocation to Vanguard's hedged foreign-bond index fund.
Conservative Vanguard Retirement-Saver Portfolio Anticipated Time Horizon to Retirement: 5 years
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
6%: Vanguard Total International Bond Market Index
With a substantially shorter time horizon, this portfolio is meaningfully more conservative than the aggressive and moderate portfolios. But given that the retirement saver's real time horizon is his or her life expectancy, it includes a sizable allocation of 55% to equities.
Because the bond stake of the conservative portfolio is substantially larger than the other two portfolios', it also makes sense to diversify it further. Investors should become more attuned to inflation protection in their portfolios as retirement draws near and they'll rely on their portfolios to supply their "paychecks"; thus, it makes sense to build out a position in an inflation-protected bond fund. Because investors with five years until retirement will still have many years in retirement, I've included Vanguard Inflation-Protected Securities, which has a long duration of 8.0 years. Investors who are concerned about interest-rate-related volatility could use Vanguard Short-Term Inflation-Protected Securities VTIPX instead. I also included a core short-term fund, as soon-to-retire investors should begin thinking about how to stage their portfolios for drawdown mode. It's too early for those using the "bucket" approach to begin raising cash, but a high-quality short-term fund is appropriate.
Because the equity piece is relatively smaller, I reduced some of the smaller actively managed positions but left the stake in Vanguard Equity-Income in place. It's a fine in-retirement holding, as is Vanguard Dividend Growth VDIGX, which is the core equity holding in my Vanguard "bucket" (in-retirement) portfolios.
How to Use As with all of the model portfolios, the key goal here is to depict sound asset-allocation and portfolio-management principles. That means that investors can and should plug in another fund in the same category if one of the funds I've named here is unavailable or if I've omitted one of their favorites. (I would have loved to include one of the Primecap-managed offerings, for example.) Alternatively, an all-index portfolio is perfectly appropriate. (My tax-efficient Vanguard retirement-saver portfolio--coming next week--will be heavy on index funds.)
Also, in keeping with the philosophy behind 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.