(PUB) Investing 2015

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A T. Rowe Price Bucket Portfolio Portfolio Matters | Christine Benz

refill bucket 1 , at least partially, and the retiree can then turn to rebalancing proceeds to supply the rest.

Aggressive Bucket Portfolio Anticipated Time Horizon: 25 or more years

Bucket 1: Years 1–2 8%

Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; percentages will vary based on the amount of assets and retiree’s spending rate)

T. Rowe Price TROW has been one of Morningstar’s favorite fund shops for decades. The firm has generally kept expenses reasonable; fielded a utili- tarian lineup light on trendy, ripped-from-the- headlines funds; and held on to managers for much of their careers. Because the firm’s lineup is dominated by actively managed funds, putting together T. Rowe Price portfolios doesn’t have the same plug-and-play simplicity that all-index portfolios do. For example, one of Morningstar’s longtime favorites, T. Rowe Price Equity Income PRFDX , is undergoing a manager change, with long-term skipper Brian Rogers set to step down in the fall. Moreover, some of the firm’s best funds are closed to new investors, including T. Rowe Price Mid-Cap Growth RPMGX , T. Rowe Price Mid-Cap Value TRMCX , and T. Rowe Price Capital Appreciation PRWCX . The firm’s willingness to close funds is a positive for existing shareholders and has helped the firm main- tain a steady A average Stewardship Grade since we began providing them. But it means that not all of the firm’s best funds are available to new investors. Bucket Basics There’s no magic to a bucket strategy. At its heart is a total-return stock/bond portfolio, managed with an eye toward delivering both capital appreciation and income with a reasonable amount of risk. Alongside that longer-term portfolio, a retiree also holds a cash “bucket” consisting of one to two years’ worth of living expenses. The idea behind the cash piece, as envisioned by financial-planning guru Harold Evensky, is that it provides a psychological buffer in turbulent times. Knowing that her living expenses are cordoned off, a retiree will be more inclined to stick with more- volatile portfolio constituents with better growth and income prospects. The retiree can then periodi- cally refill bucket 1 ; income distributions can help

Because the money in bucket 1 will be used for near- term spending needs, safety is the name of the game; we’re sticking with cash. Note that the percentage allocation in bucket 1 is an approximation; retirees should be sure to customize this amount based on their own anticipated spending needs. For example, a retiree who expects to spend $30 , 000 of her $1 million portfolio annually would hold $60 , 000 ( 6% ) of her portfolio in bucket 1 ( $30 , 000 times 2 ).

Bucket 2: Years 3–10 10%

T. Rowe Price Short-Term Bond PRWBX

7%

T. Rowe Price Inflation-Protected Bond PRIPX

15%

T. Rowe Price New Income PRCIX

Bucket 2 steps out a bit on the risk spectrum. T. Rowe Price Short-Term Bond is in place to serve as next-line reserves in case bucket 1 is depleted and income and/or rebalancing proceeds from buckets 2 and 3 are insufficient to refill it. The fund’s Morningstar Analyst Rating was downgraded to Neutral from Silver earlier this year, an outgrowth of concerns over management changes, as well as the fact that unhedged currency exposures and a focus on corporate bonds could bring the fund extra risk relative to its peers. Nonetheless, the range of returns in the short-term bond category is generally modest; even though the fund isn’t a cinch to outperform, it’s unlikely to underperform by a wide margin. Silver-rated T. Rowe Price New Income serves as a fine core fixed-income holding; senior analyst Cara Esser notes that it “packs a bit more punch” than the Barclays U.S. Aggregate Bond Index but also keeps an eye on the downside, keeping duration within 20% of the index’s and limiting expo- sure to lower-quality bonds. T. Rowe Price Inflation- Protected Bond is a fairly plain-vanilla Treasury Infla-