5
Example Portfolios
Now that you've become familiar with the basics of investing, you may be wondering how to go about doing this yourself. This will greatly depend on your goals and tolerance for market downturns, but some ideas are shown below. While the example mutual funds are from Vanguard, you could use similar low-cost, no-load mutual funds from other companies. To save on annual fees, you could even use ETFs at a brokerage charging no transaction fees within their fund family, such as at Fidelity, Schwab, or Vanguard. Some portfolio models I've seen advertised call for up to a dozen investments, however this would probably be too complex for someone who's just getting started in investing. I don't see the benefit of putting 3% in real estate and 2% in emerging market bond funds, unless you've already got a large sum to diversify.
Portfolios of Major Stock Index Funds:
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Young and middle aged: growth portfolio with moderate volatility
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40%: Total US Stock Market (VTSMX)
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30%: Total International Stock Market (VGTSX)
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20%: Total US Bond Market (VBMFX)
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10%: Total International Bond Market (VTIBX)
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Other suggestions: The “Total International” funds normally have a lot of exposure to Europe and Japan. Should you wish to diversify more into Asia outside of Japan, then you might consider an actively managed fund, due to the unstable nature of Asian markets. To help you sort through the thousands of funds out there, mutual funds rated “Gold,” “Silver,” or “Bronze” by Morningstar are highly regarded by their analysts. You can see this rating when searching for funds on the Morningstar website.
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Young and middle aged: aggressive growth portfolio with high volatility
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60%: Total US Stock Market (VTSMX)
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40%: Total International Stock Market (VGTSX)
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Other suggestions: Instead of the Total US Stock Market, you could also invest in an S&P 500 fund (such as VFINX) if you think large companies will do better than medium and small companies in market downturns. You could also further divide your international stock investments to include more emerging market stocks, such as Asia ex-Japan funds. A high-volatility portfolio is more suited to people who don't get nervous when the market takes a nosedive. When you attempt to trade stocks on their highs and lows, you are speculating on prices, which is something you should only do after making this a serious hobby (at the least). Even professional fund managers, with all of their tools, education, training, experience and support staff, have a hard time timing the market well enough to beat the major stock indices in relatively accurately priced markets like the USA.
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Approaching retirement in 5-10 years: A moderate growth and volatility portfolio.
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25%: Total US Stock Market (VTSMX)
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15%: Total International Stock Market (VGTSX)
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40%: Total US Bond Market (VBMFX)
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20%: Total International Bond Market (VTIBX)
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This portfolio shifts a lot of your money to bonds to help reduce the amount of volatility, while still allowing for growth. You can look at recent history to see how long stock market downturns last to decide if this is conservative enough. For example, the S&P 500 peaked in October 2007 before declining in value for over 5 years. It didn't achieve this level again until March 2013, but it's made major gains by 2015.
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It's anyone's guess how long the next market downturn will last. One way to hedge against this threat is buying dividend or interest-producing funds, giving up some of the growth potential in exchange for earnings. Do keep in mind that dividends are only paid out at the discretion of a company's board, and are not guaranteed, especially if their business declines. There are dividend-producing ETFs and mutual funds, as well as individual major companies producing consistent dividends for many years.
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When you get within a decade of retirement it's probably time to check in with a professional investment advisor, such as a Certified Financial Planner, to see if your portfolio will support your objectives.
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Approaching retirement in 1-4 years: A conservative, low volatility portfolio.
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15%: Total US Stock Market (VTSMX)
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10%: Total International Stock Market (VGTSX)
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60%: Total US Bond Market (VBMFX)
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25%: Total International Bond Market (VTIBX)
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This further reduces the amount of volatility by taking more money out of stocks and putting it into bonds. Some may see this as being too risky and want to go ahead with a Retirement Income portfolio a few years ahead of time. On the other hand, being too conservative may prevent you from growing your portfolio to where it needs to be to generate income in the long-term. I would stay in regular contact with your Certified Financial Planner or investment advisor at this point to avoid making any major mistakes.
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Retirement income portfolio: Low volatility, income generator
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20%: Total US Stock Market (VTSMX)
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10%: Total International Stock Market (VGTSX)
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40%: Total US Bond Market (VBMFX)
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10%: Total International Bond Market (VTIBX)
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20%: US Short Term Inflation Protected Bonds (VTIPX)
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This portfolio shifts your money heavily into corporate and US government bonds. Another way to further ensure that there is no loss of principal is to invest in funds that repay your principal at maturity, such as Bulletshares. Your portfolio should be aiming for about 5% to 6% annual total return, so that you can begin making withdrawals of about 4% to 5% to supplement your income. As mentioned earlier, get in contact with a well qualified and independent investment advisor to ensure you're on the right track to retire.
