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A Moderate Retirement Saver Portfolio

Its allocations illustrate that even 40-somethings should be mostly in stocks.

Editor's note: This portfolio was reviewed on June 10, 2019.

How different should your portfolio look when you're in your 40s versus how it was positioned when you were just starting out?

Not all that different, it turns out.

My Aggressive Retirement Saver Portfolio is designed for an aggressive beginning investor who expects to retire 40 years hence. Given that it's designed to take advantage of the younger investor's ultralong runway--and his high tolerance for short-term volatility--it featured more than 90% in stocks, including healthy dollops of small-cap and international stocks, as well as emerging-markets equities.

A portfolio for a slightly older investor, one who intends to retire in 2035 or 2040, wouldn't look all that different. Even though it's geared toward an investor with a closer retirement date, the Moderate Portfolio, too, includes more than 80% in stocks and a still-sizable allocation to foreign names.

As with the Aggressive Saver mutual fund portfolio, I've used Morningstar's Lifetime Allocation Indexes to help set the baseline asset allocations. In this case, I used the Moderate version of the 2040 Index. To populate the portfolio, I've employed no-load actively managed mutual funds that are accepting new investments and are highly rated by our analyst team. Most of the funds earn Gold ratings, but I used Silver- and Bronze-rated funds in cases where suitable no-load Gold-rated funds were unavailable.

The Portfolio, Please

The Moderate Saver portfolio consists of the following funds in the following allocations:

  • 15%: Primecap Odyssey Growth POGRX
  • 15%: Vanguard Dividend Appreciation VDADX
  • 15%: Oakmark Fund OAKMX
  • 10%: Vanguard Extended Market Index VEXAX
  • 21%: Vanguard Total International Stock Index VTIAX
  • 5%: Oakmark International Small Cap OAKEX
  • 19%: Metropolitan West Total Return Bond MWTRX

I stuck with the same basic basket of funds that I used with the Aggressive Saver Portfolio, and the allocations aren't terribly different, either.

That said, there are a couple of noteworthy differences between the Aggressive and Moderate portfolios. First, the Moderate portfolio's equity allocation is a touch lower--81% versus more than 90% for the Aggressive portfolio. Much of that differential owes to the Moderate portfolio's lighter international equity allocation; the domestic-equity stakes in both portfolios are virtually identical in size. However, investors with high risk tolerances could reasonably keep their all-in equity weightings as high as 90%.

I also tweaked the domestic-equity slice of the Moderate portfolio slightly, to give it a higher-quality tilt. I added a stake in Vanguard Dividend Appreciation, in addition to Oakmark Fund and Primecap Odyssey Growth, to give the portfolio a higher weighting in true blue chips and dividend-paying names. In addition, I reduced the portfolio's small-cap exposure via Vanguard Extended Market Index and Oakmark International Small Cap, albeit just slightly.

The bond piece of the Moderate portfolio is also higher than the Aggressive portfolio's. Note that Morningstar's Lifetime Allocation Index for 2040 retirees with moderate time horizons contains small stakes in both Treasury Inflation-Protection Securities and foreign bonds. However, the allocations are so small that it's hard to see that their effect on performance would be significant enough to make initiating new positions worthwhile. In addition, core bond fund Metropolitan West Total Return Bond often includes at least small stakes in foreign and inflation-protected bonds.

How to Use While I expect the portfolios to perform well over time, the key goal of all of my model portfolios is to depict sound asset-allocation and portfolio-management principles. Thus, midcareer individuals can use the Moderate portfolio to help assess their portfolios' positioning.

Investors won't need to check back frequently to see if I've made any adjustments, because 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.

I developed the assumption that an investor wouldn't mind buying holdings from separate firms. But because all of the holdings shown here are mainstream in their exposures, investors who would like to stick with a single provider or supermarket could likely find funds with similar characteristics at their own firms. (Here again, Morningstar analysts' Medalist funds and ETFs can come in handy.) I've also created fund-family-specific portfolios for investors at Vanguard, Fidelity, T. Rowe Price, and Schwab's supermarket.

I also developed the portfolios without consideration for tax efficiency--that is, I assumed they would be held inside of a tax-sheltered wrapper of some kind, such as an IRA. Investors who intend to hold their portfolios inside of a taxable account would want to put a greater emphasis on tax efficiency, emphasizing index funds and ETFs on the equity side, for example. I developed my Tax-Efficient Retirement Saver Portfolios with an eye toward reducing the drag of taxes in a taxable account.

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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