This article is a companion piece to the podcast on how much of your retirement nest egg you should invest in stocks. Here I’ll share some resources that can help you make this important decision.
Table of Contents:
1. Target Date Retirement Funds
Vanguard (among other companies) offers target date retirement funds. These fund of funds, as they are called, divide up your retirement investment into U.S. and foreign stock and bond funds. As you get closeer to retirement, the funds automatically start making your portfolio more conservative by investing in more bonds.
Even if you don’t decide to use these target date retirement funds, they’re a good option for conducting research. They’ll give you an idea of how Vanguard or other mutual fund companies views asset allocation, particularly when it comes to the division between stocks and bonds. It’s worth going to Vanguard’s website to see just how they allocate investments between stocks and bonds.
As an example, here is the asset allocation for Vanguard’s target date retirement fund designed for those in their late 20’s:
If you go to the Vanguard site, you can actually use the slider in the horizontal chart to see how your asset allocation would change as year near retirement.
2. Warren Buffet
Warren Buffet recently talked about asset allocation and the advice he’s giving to the trustee who will manage the money he plans to leave to his wife in his will. Buffet advice was to invest 90% in stocks and 10% in bonds.
This doesn’t mean that 90% stocks is right for you. Mr. Buffett is no doubt leaving his wife a substantial sum of money. Buffett’s asset allocation, however, underscores the importance of stocks in any portfolio seeking growth that exceeds inflation. You can hear more about Buffet’s advice to the trustee and his asset allocation advice in Podcast 41.
3. Rick Ferri
Rick Ferri is an excellent resource who has written some great books. One of my favorites is All About Asset Allocation. If you don’t know about Rick, he manages over a billion dollars in assets, and he’s a big believer in low-cost index funds from Vanguard and other sources.
I’ve known Rick for years, and I interviewed him in a podcast recently. In his book All About Asset Allocation, Rick suggests a couple of different portfolios, depending on your risk tolerance. I think, roughly, they fall into the range of 60% stocks/40% bonds up to about 80% stocks/20% bonds. In my podcast interview of Rick, he also talks about his children’s investments. They’re in their 20s, and they’re actually at 100% stocks. Regardless, that podcast and Rick’s books are good resources.
These guys are named after the founder of Vanguard, and they have some model portfolios that they call The Lazy Portfolios. They offer a two-fund porfolio, a three-fund portfolio, and some that are more complicated.
These model portfolios not only give you some idea as to the allocation between stocks, bonds, and other asset classes, but they also suggests the specific Vanguard funds you could use to implement these asset allocation plans. And for our purposes, it’ll give you some really great ideas on how much to put in stocks vs. bonds.
5. Morningstar Lifetime Allocation Index
Finally, we have the Morningstar Lifetime Allocation Index. This index is a single page that breaks down three different investing styles: aggressive, moderate, and conservative. For each of these styles, the index suggests allocations between stocks and bonds, depending on how long you have until you retire.
(Click on the image to enlarge.)
The longest retirement age on the chart is about 41 years, retiring in 2055. The index goes all the way back to retirement in 2000, for folks who retired 14 years ago.
For those retiring 40 years from now, the aggressive portfolio has 92% in stocks. The moderate portfolio has 88% in stocks, and the conservative portfolio has 79.92% in stocks. So you can see that Morningstar is a big believer in a heavy weight towards stocks.
Now, this is for those who are far from retirement. But it gives you other portfolio breakdowns for those who are getting closer and closer to retirement. It’s a great resource – a single page that’s very easy to understand.
Each of these five resources gives you information that you should use and learn from, but don’t follow any of it blindly. Instead, be sure to do your own research on asset allocation and, specifically, stocks vs. bonds. Then, make the choice that’s best for you and your family.