Simple portfolios to help you reach your retirement goals


You know you need to save for retirement, and you know that usually means investing. The difficult question is: where should you invest your money? There are over 8,000 mutual funds to choose from.

Of course, if you invest in an occupational pension plan, like 401 (k), your choices are more limited. Workers in these plans are offered an average of 28 investment options, according to a report by BrightScope and the Investment Company Institute.

Yet if you feel like the opposite of a savvy stock picker, these 28 choices may seem like 27 too many. Here’s the good news: It doesn’t have to be that complicated. You can build a smart, diverse portfolio with just a handful of mutual funds.

Why you don’t need a lot of mutual funds

One of the main ways to be a successful investor is to make sure that your investments are diversified. You want your investments to be spread across a large number of companies in different industries and locations. This way, even if one business or industry begins to suffer, others are unlikely to follow suit. What about those occasional times when all stocks seem to be in free fall? This is when the bond portion of your portfolio supports you.

The problem is, “a lot of people think that being diverse means owning a lot of mutual funds,” says Rick Kahler, financial advisor and founder of Kahler Financial Group in Rapid City, South Dakota.

Mutual funds invest in companies. They are designed so that individual investors can own shares in many companies, often through a single fund. This means that you can own a broadly diversified investment portfolio with just a few mutual funds.

“If you have a total US equity fund, a total international equity fund, and a total bond fund, you are as diverse as you can get,” says William Bernstein, a portfolio manager and author of numerous books on finance. books, including “The Four Pillars of Investing”.

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Model portfolios make it easier to select funds

Once you’ve made a commitment to diversify through mutual funds, the next question is: which funds are right for you? Some financial experts have created so-called lazy portfolios intended for people who plan to hold their investments for the long term. You can simply recreate these portfolios in your 401 (k), individual retirement account, or other retirement account. You can even spread your lazy portfolio across all of your different accounts, investing in one mutual fund in one account, another fund in another account, and so on.

The model portfolios mentioned here all use Vanguard funds. But even if your 401 (k) or other retirement account doesn’t offer access to Vanguard, the beauty of these types of portfolios is that you can create them using similar funds from other companies. For example, you can trade Fidelity Investment’s Total Bond Fund for Vanguard’s Total Bond Market ETF.

>> READ MORE: What is the expense ratio of a typical mutual fund?

A two-fund portfolio

Consider this portfolio of two funds from Rick Ferri, founder of investment firm Portfolio Solutions and author of “The Power of Passive Investing”: a global stock market fund and a broadly diversified investment grade bond fund. That’s it.

Ferri indicates two exchange-traded funds to use for his simple portfolio, both from the Vanguard Group: the Total World Stock ETF (VT) and the Total Bond Market ETF (BND).

A portfolio composed of 60% in the Total World Stock ETF and 40% in the Total Bond Market ETF would have gained 5.74% per annum from July 2008 to July 2017, assuming annual rebalancing. (A full 10-year performance is not available as the Total World Stock ETF was launched in June 2008.)

If you had invested only in an equity fund – say Vanguard’s Total Stock Market Index Fund (VTSMX) – you would have enjoyed a much higher annual return of 8.74% over the same time period, but you you would be left vulnerable to a stomach. -a hectic roller coaster during the financial crisis. This fund lost 35.12% in the last half of 2008.

The more diversified two-fund portfolio has fallen 17.24% during the latter half of 2008. It’s not much fun either, but it’s less likely that you will dive for the exit exactly when it is. most importantly to sit still and wait for the market to come. wins.

The margarita and the obvious

Another lazy portfolio to emulate was created by Scott Burns, who before retiring was a longtime financial writer and director of AssetBuilder, a fund management company in Plano, TX. Burns’ Margarita Portfolio, which gained 8.2% per annum in the five years ending July 2017 and 4.89% per annum over the 10-year period, calls for an equal allocation of your money between the following funds:

  • Vanguard Inflation-Protected Securities (VIPSX)
  • Vanguard Total Stock Index (VTSMX)
  • Vanguard Total International Stock Index (VGTSX)

Fund manager and author Bernstein created the No-Brainer portfolio, which involves investing equal parts of your money in four funds:

  • Vanguard 500 Index (VFINX)
  • Vanguard Small Cap Index (NAESX)
  • Vanguard Total International Stock Index (VGTSX)
  • Vanguard Total Bond Market Index (VBMFX)

This portfolio gained 10.2% per annum over the five years ending in July and 5.78% per annum over the 10-year period.

More complex and simpler options

Those looking for even greater diversification might add two asset classes: real estate and inflation-protected Treasury securities, or TIPS, says Kahler. “I call them anti-bonds because they are indexed to inflation,” he says.

Suppose you want 60% of your portfolio in stocks and 40% in bonds. You could put 30% of your portfolio in a total bond market mutual fund such as the Vanguard Total Bond Market Index Fund (VBTLX) and 10% in a TIPS fund, such as the Vanguard Inflation-Protected Securities Fund (VIPSX) , he said. . On the equity side, you could put 45% of your portfolio in a global equity fund (VTWSX) and 15% in a real estate investment trust fund, like the Vanguard REIT Index Fund (VGSLX).

This portfolio of four funds has gained 7.33% per annum in the five years ending July 2017 and 6.05% per annum in the nine years since the inception of VTWSX. In its worst year during that time, it fell 19.74%.

Or, if you want to be super simple, you can invest in just one fund. Typically that would mean a balanced index fund or target date retirement fund, which not only creates a diversified portfolio for you, but also rebalances that portfolio over time. For example, the Vanguard Balanced Index Fund (VBINX) invests in a portfolio made up of 60% stocks and 40% bonds. It gained 9.54% per year over the five years ending in July and 6.49% per year over 10 years, with a worst performance of minus 22.21%.

>> READ MORE: Are Robo-Advisors Better Than Target Date Funds?

Watch out for fees

However, when choosing a fund, beware of the fees. One of the most important investment decisions you will make will be choosing inexpensive mutual funds.

What does low-cost mean? Granted, a mutual fund expense ratio of 1% or more is too expensive. Nowadays, many funds charge much less. For example, the Vanguard Balanced Index Fund charges an expense ratio of 0.19%, and some of the target date funds offered by Vanguard Group cost less than that.

After you’ve created your lazy portfolio, sit back, put your feet up, and think about other things besides investing. At least until it’s time to rebalance.

Learn more about the fees and diversification of mutual funds.

The article Simple Portfolios to Help You Reach Your Retirement Goals originally appeared on NerdWallet. Andrea Coombes is a writer at Nerdwallet. Email: Twitter: @andreacoombes.

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