(PUB) Investing 2016

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An Update on Model Portfolios Portfolio Matters | Christine Benz

or Schwab—can find company-specific portfolios on the model portfolios’ main page.

Mutual Fund Bucket Portfolios (Aggressive, Moderate, Conservative)

Original Launch Date: August/September 2012

“Do you still recommend the model portfolios you put out a few years ago?”

Changes: These three portfolios, which consist of traditional mutual funds and are geared toward taxable accounts, have undergone a few changes since their initial creation. The most significant was swap- ping T. Rowe Price Short-Term Bond PRWBX for Fidelity Short-Term Bond FSHBX following the former fund’s Analyst Rating downgrade to Neutral in early 2015 . Of course, the raw materials for strong results in the short-term bond Morningstar Category are limited, given today’s ultralow yields, and the T. Rowe Price fund is unlikely to flame out. But the Silver- rated Fidelity fund looks appealing in a bond market environment where more can go wrong than right; it’s conservatively positioned, with a higher credit quality and shorter duration than its typical peer. As such, it’s appropriate to serve as “next-line” reserves in a bucket strategy, meaning that it can be tapped if the cash piece of the portfolio is empty but the retiree needs additional cash. Additionally, while my original bucket portfolios relied on Harbor Real Return HARRX to provide exposure to Treasury Inflation-Protected Securities, I switched to Vanguard Short-Term Inflation-Protected Securities Index VTIPX in early 2014 . While PIMCO Real Return PRRDX , of which Harbor Real Return is a near- clone, is a solid Silver-rated fund, I’m compelled by the Vanguard fund’s short-term focus. Although the returns of Vanguard Short-Term Inflation-Protected Securities have lagged those of some longer-term TIPS funds, including Vanguard Inflation-Protected Securities VIPSX , I like that the short-term fund pro- vides purer inflation protection without a lot of interest-rate-related volatility.

I’ve received variations on this general question over the past several months. The short answer? Yes. By giving the model portfolios a permanent home with their own landing page on Morningstar.com, the idea is that they can readily be accessed. As such, the portfolios should be up to date at any given point in time. If a material change at one of the holdings has resulted in a change in its Morningstar Analyst Rating, or if I’ve changed my thinking on its suit- ability in the portfolio, you can expect to see those changes reflected in short order. That said, readers shouldn’t expect to see frequent changes in the portfolios for a few reasons. For one thing, my approach to asset allocation with these portfolios is strategic and hands-off: I employed Morningstar’s Lifetime Allocation Indexes to help guide the portfolios’ exposures to the major asset classes, and these indexes don’t change frequently. Moreover, I relied on Morningstar Medalist ratings for the portfolios’ investment choices, and one of the implicit goals for the medalists is stability. In the spirit of Warren Buffett, Morningstar’s manager research ana- lysts like to recommend funds and exchange-traded funds that you could hold “forever.” positioning and holdings. I’ll review the various mutual fund and ETF “bucket” portfolios that I’ve created for people who are already retired—or getting ready to. Note that all of the portfolios discussed below are free-range—that is, they pick and choose among holdings from multiple providers. Investors who prefer to do business with a single firm—say Vanguard Nonetheless, many of these portfolios are two years old or more, so it’s a good time to review their