(PUB) Investing 2015

17

September 2015

Morningstar FundInvestor

portfolio includes next to nothing in small-value stocks, which have tended to outperform large-cap and growth stocks over long periods of time, I added a slice of dedicated small-cap-value exposure via the firm’s index fund. On the international-equity side, I’ve employed two fine actively managed funds— Vanguard Interna- tional Growth VWIGX and Vanguard International Value VTRIX —that complement one another well. Here again, an investor could reasonably use a total international-stock fund in lieu of the active offerings. Because the time horizon for this portfolio is so long, it includes but a tiny slice of fixed-income exposure. And while Morningstar’s Lifetime Allocation Indexes call for a small stake in commodities, Vanguard fields no such fund. The closest approximation is Vanguard Precious Metals and Mining VGPMX , which has historically had a much closer correlation with the equity market than metals’ prices. I’ve steered that position to stocks instead, though investors in search of extra diversification plus, potentially, an inflation hedge might also consider Vanguard Global ex-U.S. Real Estate Index VGXRX . Moderate Vanguard Retirement-Saver Portfolio Anticipated Time Horizon to Retirement: 20 Years Even though it’s geared toward an investor in his 40 s with a 20 -year time horizon, this portfolio is also stock-heavy, with an 85% allocation to U.S. and foreign stocks. The key variance with the aggres- sive portfolio is that this one is lighter on foreign stocks and has a slightly heavier fixed-income position, including a small allocation to Vanguard’s hedged foreign-bond index fund. Conservative Vanguard Retirement-Saver Portfolio Anticipated Time Horizon to Retirement: 5 Years With a substantially shorter time horizon, this port- folio is meaningfully more conservative than the aggressive and moderate portfolios. But given that the retirement saver’s real time horizon is his life expectancy, it includes a sizable allocation of 55% to equities. Because the bond stake of the

conservative portfolio is substantially larger than the other two portfolios’, it also makes sense to diversify it further. Investors should become more attuned to inflation protection as retirement draws near and they’ll rely on their portfolios to supply their “paychecks”; thus, it makes sense to build out a position in an inflation-protected bond fund. Because investors with five years until retirement will still have many years in retirement, I’ve included Vanguard Inflation- Protected Securities VIPSX , which has a long dura- tion of 8 . 0 years. Investors who are concerned about interest-rate-related volatility could use Vanguard Short-Term Inflation-Protected Securities Index VTIPX instead. I also included a core short-term fund, as soon-to-retire investors should begin thinking about how to stage their portfolios for drawdown. It’s too early for those using the “bucket” approach to begin raising cash, but a high-quality short-term fund is appropriate. Because the equity piece is relatively smaller, I reduced some of the smaller actively managed positions but left the stake in Vanguard Equity-Income in place. It’s a fine in-retirement holding, as is Vanguard Dividend Growth VDIGX , which is the core equity holding in my Vanguard “bucket” (in-retirement) portfolios. How to Use As with all of the model portfolios, the key goal is to depict sound asset-allocation and portfolio-manage- ment principles. That means investors can and should plug in another fund in the same category if one of the funds I’ve named here is unavailable or if I’ve omitted one of their favorites. (I would have loved to include one of the Primecap-managed offerings, for example.) Alternatively, an all-index portfolio is perfectly appropriate. Also, in keeping with the philosophy behind the bucket portfolios, I’ll employ a strategic (that is, long-term and hands-off) approach to asset alloca- tion; I’ll make changes to the holdings only when individual holdings encounter fundamental problems or changes. K Contact Christine Benz at christine.benz@morningstar.com

Retirement-Saver Aggressive

Time Horizon to Retirement: 40 yrs

30% Vanguard Tot Stk Mkt VTSMX 10% Vanguard Eq-Inc VEIPX 5% Vanguard Mid Cap Gr VMGRX 10% Vanguard Sel Value VASVX 5% Vanguard Sm Cap Value VISVX 20% Vanguard Intl Growth VWIGX 15% Vanguard Intl Value VTRIX 5% Vanguard Tot Bd Mkt Index

Retirement-Saver Moderate

Time Horizon to Retirement: 20 yrs

30% Vanguard Total Stk Mkt 10% Vanguard Equity-Income 5% Vanguard Mid Cap Growth 10% Vanguard Selected Value 5% Vanguard Sm Cap Value Idx 15% Vanguard Intl Growth 10% Vanguard International Value 12% Vanguard Tot Bd Mkt Index 3% Vanguard Tot Intl Bd Mkt VTIBX

Retirement-Saver Conservative

Time Horizon to Retirement: 5 yrs

25% Vanguard Total Stock Mkt Idx 10% Vanguard Equity-Income 5% Vanguard Small Cap Value Idx 10% Vanguard Intl Growth 5% Vanguard International Value 23% Vanguard Tot Bd Mkt Index 7% Vanguard Sht-Trm Bd Idx VBISX 9% Vanguard Infl-Prot Sec VIPSX 6% Vanguard Tot Intl Bd Mkt VTIBX