Investors who started their investment careers 20 years ago--which is the group that our Moderate ETF Saver portfolio is created for--have endured one heck of a ride.
They've seen the dot-coms rise and fall, and a different set of dot-coms grow up in their place. They've invested through 9/11, wars in the Middle East, the global financial crisis from 2007-09. Most recently, they've lived through 2020's pandemic-related market shock and subsequent sharp recovery.
Having gone through numerous stress tests, many midcareer savers are probably getting a sense of their investment dispositions, and that should be informing how they invest. Nerves of steel? Even though they're getting older, such investors should harness their still-long time horizons by holding portfolios that are primarily equity. But they should also bear in mind that long-running bull markets have a tendency to make us feel more risk-tolerant than we actually are.
Meanwhile, investors with a track record of buying and selling at the worst possible times might do well to maintain a slightly more conservative mix. And if they're still not confident they'll keep their mitts off their portfolios when things get rocky, they should also consider outsourcing their investment management to a professional financial advisor--or at a minimum, to a good-quality target-date fund--to help provide behavior management on an ongoing basis.
My Moderate ETF Saver Portfolio aims to strike a reasonable balance for both types of investors. It harnesses the 40-something's 20-plus-year time horizon by holding primarily stock ETFs. But in contrast with the Aggressive Saver ETF Portfolio, which is all equity with the exception of a bond commodities component, the Moderate Saver holds a complement of high-quality bonds, a stake that will ramp up over the next 20 years. The basic idea is that, as retirement draws close, the investor mitigates the portfolio's vulnerability to sequencing risk by holding bonds and cash at the front end of the portfolio. Should the new retiree encounter a bum market early on, he or she can spend the portfolio's cash and bonds while leaving the equity portfolio in place to recover.
As with my other model portfolios, I used Morningstar's Lifetime Allocation Indexes to inform this portfolio's asset allocation. I relied on our passive fund researchers to help select the holdings.
The Portfolio Details This portfolio uses the moderate version of the Morningstar Lifetime Allocation Index, geared toward investors retiring in 2035, to guide its allocations. Thus, it's appropriate for an investor who's closing in on age 50. Its baseline asset allocation is roughly 50% U.S. stock, 25% foreign stock, and 20% bond.
I employed the same equity holdings, albeit in slightly reduced allocations, that appeared in the Aggressive ETF Saver Portfolio. I used a total U.S. market index fund as the anchor equity holding; with just a 0.05% expense ratio, it keeps the total portfolio's costs way down. I augmented it with a small position in a small-cap value index to harness that asset class' historic performance edge relative to U.S. blue chips and to facilitate periodic intra-asset-class rebalancing. (Indeed, investors who have small-value exposure in their portfolios and haven't rebalanced recently may want to do so; small-value stocks have dramatically underperformed the S&P 500 and especially large-growth stocks recently.)
On the international side, I employed discrete developed- and emerging-markets index funds. Not only are both funds cheaper than a total international-stock index ETF, but holding the two funds also facilitates rebalancing, as developed and developing markets haven't always moved in lockstep.
Of course, employing total U.S. and international-stock ETFs or index funds would be a perfectly reasonable way to go, too. By limiting the number of moving parts in a portfolio, an investor might also squelch his or her impulse to make unnecessary trades.
- 47%: Vanguard Total Stock Market Index ETF VTI
- 8%: Vanguard Small-Cap Value ETF VBR
- 20%: Vanguard FTSE Developed Markets ETF VEA
- 5%: Vanguard FTSE Emerging Markets ETF VWO
- 20%: iShares Core Total USD Bond Market IUSB
How to Use
As with my model Bucket portfolios, the goal of the Saver portfolios isn't to shoot out the lights over short time frames. Rather, it's to demonstrate sound asset-allocation principles and to showcase some of Morningstar's best ideas in the context of a goal-based portfolio. I'll employ a strategic approach to asset allocation, making changes on an annual basis, and only to rebalance back to the baseline asset-allocation targets.
I've used ETFs in these portfolios, but investors could reasonably use traditional index mutual funds instead. Equity exchange-traded funds will generally be more tax-efficient over time than comparable index mutual funds, but both types of products are extremely tax-efficient. (In Vanguard's case, because the ETFs are actually separate share classes of traditional index funds, the tax differential should be negligible to nonexistent.) And while this portfolio tilts heavily toward Vanguard's ETF lineup, investors might reasonably employ a similar basket of ETFs from other providers.
Finally, it’s worth noting that I’ve developed these portfolios without regard for tax efficiency. Investors who wish to hold the portfolios inside of a taxable account should consider holding total market U.S. and international equity ETFs rather than the more narrow ETFs that appear in the portfolio. They might also consider holding municipal bond funds instead of the taxable fixed-income holding featured here.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.