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Moderate risk retirement portfolio allocation

edited May 2011 in Fund Discussions
I am close to an arrangement with a financial planner to manage half my retirement portfolio. I recently retired, am in my mid-60s and need someone trustworthy to assist my spouse after my death. I have told the planner I want to keep half the portfolio allocated in an existing IRA with three Vanguard index funds -- 50 percent in Total Stock Mkt (VTSAX), 40 percent in Total Bond Mkt (VBTLX) and 10 percent in Total International Stock Mkt (VGTSX). So that leaves the remaining half of the portfolio for the planner to advise. My prerequisites are no-loads, a 5-year track record and minimum three M*s. Considering how the Vanguard half is allocated, what would be a moderate risk allocation of about eight more funds or indexes to round this out? Thank you.


  • I think the company you do business with is more important than M*s. Star ratings come and go but I do use 3 year performance when evaluating a possible additional fund or a swap. I am retired, my wife is retired. According to M* instant xray, I'm 14% cash, 34% US stocks, 6% foreign stocks, 44% bonds, 3% other. I have 6 funds and a very small brokerage account. My goal is to match or exceed what I take out + inflation. For the 3 years I've been retired I've done that. I don't use an advisor because I have been doing this for decades and fail to see how the expense would be of any value. If your spouse is like mine she has very little interest in the portfolio but the best thing you could do for her is to go through it with her until she understands what you're attempting to do, how you are doing it and what to do in the event that she loses you. Make it fun and get her involved.

    My company of choice is T. Rowe Price. I think Vanguard is fine but I just don't like the company for what has happened there since Bogle retired.
  • Skipper:

    1) Two recent threads started by MJG have generated rich discussion on the subject of robust 50/50 portfolios constructed from two or three conservative or moderate allocation funds. One of the take-home points I get from that is you can get pretty far with a pretty simple portfolio (3 funds, not 8) that will not take much monitoring. The threads contain many excellent suggestions for funds and fund combinations that could be worth considering.

    2) You sound like you have a pretty good handle on what you are trying to do. Like Ed, I am skeptical of the value to be added by the planner, especially when it sounds like it is really not for you, but for your spouse. I would suggest you could invest a little bit of time in creating an investment policy statement, and define as simple a plan as you can formulate while staying in line with your goals and convictions. This could be kept to one - two pages, most likely. Then you could use that brief document in the type of discussion with your spouse that Ed suggests.

    3) Detail point about your Vanguard index fund portfolio. You might consider 83% Vanguard Balanced Index (VBIAX), 7% Vanguard Total Bond Market Index (VBTLX) and 10% Vanguard Total International Stock Market (VGTSX). The main reason for this tweak is that the Balanced Index fund already has a rebalancing discipline built into it, which will minimize portfolio management responsibilities. A possible second reason is that trailing return figures suggest you will regularly do better with the balanced index fund than you will with the seemingly equivalent 60% total stock market index fund and 40% total bond market index fund. Perhaps there is an explanation for this numerical anomaly, but I can't think of what it is.

    Best of luck.


  • Ed and GregfromBoston, my heartfelt thanks for your candid and insightful suggestions which I will weigh carefully. It is feedback like this that makes this group so special and helpful. --Skipper.
  • edited May 2011
    Howdy Skipper,

    Yes, Ed and GFB provided some very important thinking points.

    You did not mention which "type" of advisor you chose, NOR what
    your investment options/choices are and what type of fees will be

    Do you feel comfortable with what your advisor understands about your investment thoughts; and do you feel assured your advisor knows what he/she is doing? How did the advisor fair with other accts in the 2008 market melt? What methodologies does he/she use to determine market conditions; and/or at least market conditions and directions related to what will be your investment areas?

    One reads about the assessment questions that an advisor may present to a client about market risks and the client's comfort zones. A similar list of questions should be presented to an advisor to help find out "where their head is at".

    Take care,
  • Thanks, Catch. He's a fee-based planner who charges 1.5 percent of assets under management. His firm is based locally with his name and is affiliated with UBS Financial Services. The account would be a "UBS Strategic Advisor Acccount." A model portfolio he suggests included funds from a variety of families such as Templeton, Lord Abbett, First Trust, Loomis Sayles, Janus, Miller, and he tells me they have access to most mutual funds. He spent a lot of time with me on issues like risk tolerance and investment history, mainly my Vanguard 401K which was mostly equities for many years. Told him my main goal is capital preservation with moderate risk, whatever that means. Also told him I never wanted to go through another 2008 again with 45 percent loss. I could probably tolerate 10-15 percent downturn but not a whole lot more at this stage in my life. Thanks again.
  • MJG
    edited May 2011
    Hi Skipper,

    Congratulations on your recent retirement. I’m sure you and your wife will enjoy it for many happy and hopefully prosperous years.

    Congratulations also on your current financial status; it seems that you have prepared well for that retirement.

    You have already received some excellent suggestions relative to completing your portfolio. In particular I would endorse and encourage the advice to get your wife involved in the understanding and execution of your retirement portfolio. This need not be a time consuming or complex process, especially since it appears that you have already endorsed an investment approach that favors an infrequent trading policy that uses passively managed mutual fund products.

    I recommend that you offer your reluctant wife an introductory investment book that might whet her financial appetite. Two candidate books that conceivably could satisfy that mission are Burton Malkiel’s “The Random Walk Guide to Investing” and Daniel Solin’s “The Smartest Investment Book You’ll Ever Read”. Both books are clearly written, provide simple, excellent discussions of the investment process, and are breezy reads. An added benefit, is that each volume is under 200 pages long so they are not intimidating.

    You appear to have made your top-tier asset allocation decision with your current equity/bond mix. You have partially implemented that strategy with cost containment Vanguard holdings for one-half of your portfolio. Your choices are excellent.

    Given what I perceive as your broad asset allocation policy and your investment philosophy, I too see no need to hire an investment advisor. Any potential value-added must be measured against the sure increase in cost of implementation and recurring cost. History suggests that the incremental cost penalty of such a decision is not likely to be rewarded with any excessive returns. Advisor ability to forecast market movements are just as cloudy as yours. Also, by avoiding an advisor, you will not be exposed or encouraged to increased trading frequency pressures beyond your comfort zone.

    How about your baseline total portfolio construction?

    If you have no special market insights or strong investment preferences of prejudices, I would suggest that you expand your portfolio positions to more or less capture the global marketplace capital distribution with Index products from Vanguard whenever possible.

    I have taken the liberty to deploy your current positions as a firm starting point, and postulated that you wish to retain them. I have augmented that portfolio with additional holdings such that the total adds to 100 %. I assume you have some cash holdings such that you will not be forced to enter the market during any substantial market downturns. The average of these downturns is like two and one-half years.

    Here is my proposed portfolio with a few comments that justify each position.

    (1) Vanguard Total Stock Mkt (VTSAX) – your core equity position
    (2) Vanguard Total Bond Mkt (VBTLX) – your baseline longer duration bond position.
    (3) Vanguard Total International Stock Mkt (VGTSX) – your core foreign holdings, mostly in developed economies.
    (4) Vanguard Small Cap Value Index (VISVX) – diversification into a class that potentially enhances portfolio returns that reflects the Fama-French small value factor findings.
    (5) Vanguard REIT Index (VGSIX) – diversification into commercial property assets.
    (6) Vanguard Emerging Markets Index (VEICX) – more foreign exposure into less developed foreign markets.
    (7) Vanguard Inflation Protected Securities (VIPSX) – Inflation insurance.(8) Vanguard GNMA Inv (VFIIX) – diversification into the housing sector.
    (9) Vanguard Short Term Investment Grade Corporate Bonds (VFSUX) – Short duration bonds that are relatively insensitive to Interest rate movements that serve to act like a second cash reserve cushion.

    I propose a 60/40 equity/fixed income mix, mostly guided by your present asset distribution. I assume you are comfortable with your present positions so I kept the holdings, but I did alter some of the percentages. I attempted to minimize actions on your part, but some trading activity is required.

    Here is a provisional asset allocation using 9 mutual fund entities. ETF products are easy substitutes if you prefer.

    (1) VTSAX –- 30 %
    (2) VBTLX – 20 %
    (3) VGTLX – 10 %
    (4) VISVX – 10 %
    (5) VGSIX – 5 %
    (6) VEICX – 5 %
    (7) VIPSX – 5 %(8) VFIIX – 5 %
    (9) VFSUX – 10 %

    There are a zillion equally attractive alternate portfolios. This portfolio has very low costs. It also offers sufficient diversification such that portfolio volatility is probably one-half that of an all-equity portfolio without significantly sacrificing expected annual returns. This portfolio should deliver fewer negative annual returns than a more aggressive portfolio which should allow you to sleep better at night. Also this type of portfolio demands less monitoring which should permit your family more free time to access attractive retirement options, like extensive world travel

    Over the next five to ten years, you should address asset allocation adjustments as your lifestyle, the economy, and investment opportunities evolve. Given the steady eroding impact of time, it is likely that your portfolio will require a more conservative asset allocation. An adjustment to the 50/50 or even the 30/70 equity/fixed income mix might be dictated by conditions.

    These adjustments should be made deliberately and incrementally. Do not rush to judgment. In most scenarios there is no need to hurry.

    I hope this candidate portfolio helps you and your wife just a little bit.

    Best Wishes,


  • Thank you, MJG, for your wonderful detailed and very helpful advice, and for taking considerable time to do this for me. The wisdom on this special forum -- and the sharing, caring attitude -- are truly breathtaking. Everyone's feedback has pretty much persuaded me I can handle this without a planner. Thanks for bolstering my confidence and for helping guide me down this new path. --Skipper
  • MJG,

    Good advice, but now that you have done all the work, how is the poor annuity salesman going to earn commission for his Ferrari? (There was a VA salesman who posted his Ferrari picture on our housing blog bragging how VA serve the customer with guarantees. Of course those guarantees have skyrocketed in price now)
  • MGJ,
    I would appreciate your rationale using VBTLX – 20 %
    a long duration fund?
  • Hi Anonymous ron,

    Skipper originally included the VBTLX bond fund as part of his asset allocation at a 40 % weighting.

    My reply to Skipper was guided by a desire to maintain as much as his original selections as possible. Only he knows the detailed reasoning that went into those specific selections. I do not own VBTLX.

    I did propose an alternate portfolio that in its expanded form did still hold a reduced position in that original bond fund. I wanted to minimize perturbations. However, I also recommended a reduction in its weighting (to 20 %), and, concurrently, the addition of other intermediate-term and short-term bond mutual funds. My logic was to reduce the overall duration of the fixed income portion of the portfolio.

    Given the current low interest rate environment and government deficit spending, I suspect that both inflation rates and interest rates will increase in the near future. Long term government bonds will be hurt if that happens. Therefore, given the present economic and political conditions, I favor an overweighting of short-term fixed income entities. Since uncertainty always exists in any market projection, I usually follow an incremental change policy.

    As a general rule, I personally do not like long-term government bonds unless the interest rate is North of 7 %. That percentage comes from a Bill Gross book written in the late 1990s.

    I hope this clarifies my thoughts on this posting line.
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