Asset Allocation for Near and Active Retirees
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As you near retirement, your allocation should reflect your shorter investing horizon. In retirement you’ll begin to spend some of the income from your investments, and financial advisers generally recommend changes to your asset allocation to reflect this short term need for cash. As a result, the allocation to bonds typically increases while your allocation to stocks declines. As we’ve discussed in earlier articles in this series, there is no one-size-fits-all portfolio. We have been looking at Richard Ferri’s recommendations in his book, All About Asset Allocation
In his book, Ferri suggests holding anywhere from 60% in stocks (aggressive) to 35% (conservative). The moderate portfolio, according to Ferri, would hold 50% in stocks. For Ferri’s two recommended portfolios, he takes the moderate approach. The first of these two portfolios is his basic portfolio, which uses six mutual funds and ETFs. Here it is:
Near and Active Retirees--Basic Portfolio
| Asset Class | Percent | Sample Low-Cost Funds and Symbols |
|---|---|---|
| U.S. equity | 30% | Vanguard Total US Stock Market Index (VTSMX) |
| International Equity | 15% | Vanguard Total International Portfolio (VGTSX) |
| Real estate | 10% | Vanguard REIT Index Fund (VGSIX) |
| Fixed income | 45% | iShares Lehman Aggregate Bond Fund (AGG) |
| Short-term bonds | 13% | Vanguard Investment Grade Short-Term (VFSTX) |
| Money markets | 2% | Low-cost money market fund with checking |
if you want a little more control over your asset allocation, Ferri also recommends a multiple asset portfolio. It includes 14 mutual funds and ETFs, and will require more time to manage. Here it is:
Near & Active Retirees--Multiple Asset Class Portfolio
| Asset Class | Percent | Sample Low-Cost Funds and Symbols |
|---|---|---|
| U.S. Equity | ||
| Core U.S. equity | 23% | Vanguard Total U.S. Stock Market Index (VTSMX) |
| Small value | 5% | iShare S&P 600 Berra Value (IJS) |
| Micro Cap | 2% | Bridgeway Ultra Small Company Market (BRSIX) |
| Real estate | 5% | Vanguard REIT Index Fund (VGSIX) |
| International Equity | ||
| Pacific Rim--large | 3% | Vanguard Pacific Stock Index (VPACX) |
| Europe--large | 3% | Vanguard European Stock Index (VEURX) |
| Small cap | 2% | Vanguard International Explorer Fund (VINEX) |
| Emerging markets | 2% | DFA Emerging Markets (DFEMX) |
| Fixed Income | ||
| Investment-grade | 10% | iShares Lehman Aggregate Bond Fund (AGG) |
| High-yield | 10% | Vanguard High Yield Corporate Bond (VWEHX) |
| Inflation-protected | 10% | Vanguard Inflation-Protected Securities (VIPSX) |
| Emerging markets | 5% | Payden Emerging Markets Bond (PYEMX) |
| Short-term bonds | 13% | Vanguard Investment Grade Short-term (VFSTX) |
| Cash | ||
| Money markets | 2% | Low-cost money market fund with checking |
Now, if you are really paying attention, you’ll notice a problem with the multiple asset allocation. Give up? When you add up the allocations, it only gets you to 95%! Well, nobody’s perfect, and I’m pretty sure Ferri would add the other 5% into the Fixed Income category, and my guess would be to put it in the Investment-grade fund. Otherwise, sit back, relax, and enjoy retirement.
5 Comments, Comment or Ping
Al Brockman
Hi - I don’t know when Ferri wrote his book but my guess is that these asset classifications had lower correlations both among themselves and compared to the S&P 500. I thought that a key element of asset allocation was diversification with there being low correlation among asset classes. Any comments on this element of asset allocation?
Sep 5th, 2007
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