ano [An Aggressive Reirerent Pertlioin 3 Buckets vecone: Register |Subserbe |Log in |Company Ste yo Today's Yon Credit cards Ucar nay Wembership Wome [Portola Stocks | fonds | Funés | e1rs | cers | Markets | Took | Reallte France | Osaise {meroving Your Finances An Aggressive Retirement Portfolio in 3 Buckets We revisit our original bucket portfolio, check up on performance, and make a few tweaks. Print Comment Recommend)“ Gsuame_) uke () (A By Costas Bena | 215-4 [05:00 AM | ENRILARSE "TVe been folowing the bucket strategy with interest. But do you stil recommend the bucket portfotos you put out afew years ago?" ve been receiving a version of this emai with increasing frequency during the past several menths, and the question is a logical one. I fst rolled out the model bucket portfoles--one Series using tradtional mutual funds and another using exchance- ‘ade funds--in 2012. And i's wise to question any Investing formation that's| more then @ year olf, especially # & includes specie recommendations ‘The short answer is that yes, the portfoios--both mata fund and ETF--stil make sense ‘tome, and they should, as they're designed for hands-off Investors. That sad, recommend a coupe of sal ‘tweaks to the portfolios 1 Inkiaby presented, particularly to remave some interest-rate sensitivity, “This week, TH revi the fst of the portfobos-a tree-bucket rrtval fund portfobo for ‘usta gathor tetas wih tie horizons of 25 i) Stine ene s momngstars arecte years or so. Wah a roughly 50% Se) sincerest gr S38 Sey gation and te DP) cit tanscing Your Finances sna reminder in cash and bonds, the mamiestor Gite Mutual Funds: the portoto is aggressive, Star Svateaes or Sues Tolow’ geared toward younger retkees Ghnsting on Tweter:Bewstine.tenz ino are confortable with the Contact Author Mectatherinvestin sarcalsts higher volotity that ee Ee accompanies an equty-neavy Bucket Basics ‘The central idea of the bucket strategy, as envisioned by financial-pianning aur Harold Evensky, isto include a cash bucket to cover near-term cash needs. Over time, the cash bucket will weigh on the portfoll’s performance, as longer-term assets (stocks and bonds) willtend to generate better retums. The big benefit of the cash cushion, however, is that It provides peace of mind fora retires to know ‘that assets for pending expenses ate safely segregated from tne more volte assets inthe portfolo. Even na scenario in which the stock portion of the portato ipuinows morringstr comartilendlaticleaspxNd= 626019 10 Today's Top Creat Cards ‘Taker Prce(s)change(%) max 70.78 appx 12.18 Asmox 15.36 pawex 4.80, isms 46.74 wwx 2507 mnt 301.41 vo nex 49.47 oar Morningstar Rating erred fe fee ee tie take fee tee Morningstar report 6zara Cropped precipitously, the retiree could spend the cash in buckst 1 and even move ito the portfol's next Ine reserves--short-term bonds--without having to sell any stocks at 2 low ebb, (Fora look at how sueh 2 portfolo Would funetion While one i actively érawing fromit for ving expenses, sus ay buckst parlfolo srs tosis.) This particular portfolo is geared toward retirees who expect to live 25 or mare years in retirement. I've assumed a $1.5 millon portfol for lustration purposes, but people with smaler or ger portfolos can scale ther investment weightings up or own accorsinaly. Note that the key step before embarking on any portfolio plan i fensure that your spencing rate ie sustainable, as discussed here, Im assuming 2 4% wriérawal ($60,000) in year 1 of retirement, with that dollar amount adjusted upward to keep pace with inflation in subsequent years. As bucket 1s depleted to rreet living expenses, the retiree would refit using income and givens distrbutions andor rebalancing proceeds. 1's also worth noting that the goal ofthese portfolios isnt to generate the best ‘tums of any retirement portfolo on record, but rather to help retirees and pro retires visualize what a long-term, strategic total-retum portfolio would look Ike Thus, a newly retiree investor could follow the basic bucket concept wienout completely upending exsting favorte holdings The portfolio incudes three buckets geared toward the near intermediate, and tong im. I made one change apiece in buckets 1 and 2 compares with my previous Suggestions, and Ileft bucket 3 alone. Bucket 1: Years 1-2 Original Portfolio + $60,000: Cash (carticates of deposi, money market accounts, and s0 on) ‘$60,000: & PIMCO Enhanced Short Maturty ETF (MINT) ‘Adjustment: Keep entire $120,000 in cash (certificates of deposit, money market accounts, and so on) instead of investing $60,000 in PIMCO Ennanced Short Matunty ‘The goal af this portion of the portato & to provide money for cash needs in years snd 2 of retiement, Bucket 1 in the orignal version of this portfolio included both ‘true cash as wall ax @ small stake in PIMCO's ubrashor: bond ETF--for yeare 1 and 2 of reteement-income needs, respectively, That's not an unreasonable setup, ‘especialy for investors who can tolerate a bit af principal volatity that will accompany the ultrashort fund That sae, investors are not getting paid to take on extra risk in an ubrashert bond func right now. The PIMCO fund's 0.50% SEC yiele can be easly outstrippec by a ‘wor or even one-year CD, and its 0.35% expense ratio, wile not high, isnt helping rratters. As Mornioastar ETFInvestor editor Sam Lee said in @ his most mcent. {2nalvie of the fung, investors are better off sticking with cash. Im with Sam on thi Bucket 2: Years 3-10 Original Portfolio + $130,000; @ 1. Rowe Price Short-Term Bond (PRWEX) + $150,000; © Harbor Bond (HABDX) + $100,000; © Harbor Real Return (HAREX) + $100,000: D Vanguard Wellesley Income (VWINX) ‘Adjustment: Use Vanguard Short-Term Infltion- Protected Securtles Index (VTIPX) (or (WEIR), the ETF) instead of Harbor Real Return; other postions stay the same, ‘Ths portion of the portfolio designed to deliver slightly more incame than Bucket 1, as well asa dash of inflation protection and capital appreciation. The T. Rowe Price Short-Term Bond fund is there f, in worst-case scenario, bucket 1 were depleted and rebalancing proceeds and/or income from the portfolio were insufficient meet Iving expenses. Despite the prospective headwinds of rising interest rates, Im stil comfortable wth ‘he fact that ths portion of the portfolio is anchored in bends, The tnchpin bone holding, Harbor Bond, ray suffer some short-term volatlity # and when rates rise ‘agnin indeed, f lost 3% when bond yields spiked dunng the sumer of 2013, Over time, however, the fund shoulé be able to make up short-term principal losses by ipsinous. morning sta.comvar cleric aspre=638018 ‘An Aggressive Retirement Portfolio in Buckels HAREX 9910.1 ace shee it Morningstar Anatst reports you can get our tapert Buy/Sell aphions on over 3900 Stock ana Funds Ehretine Benz devs not oun snares any ofthe Seuurties mentioned soove. rind out about Top Bo 3 Morningstar Premium Your investments can go further WER OUA Ce Reng Cea! pula 10 High-Conviion Purchases by Our Ultimate Stoo Peers ‘An Aggressive Retirement Portfolo in 3 Buckets Top Sond-Fund Pieks for Ratrees eters: Pay Up for Qualty Dividends ‘Also in Tavesting Specialists Sponsored Linksano An Aggressive Retirement Portion 3 Buckets ‘swapping into higher-yelding bonds as they become availble; manager Bil Gross also has the abilty to delve into some bond market sectors that some pear funds cant or wont touch, including emerging markets, and I think that flewbity should hold the fund in good stead. ‘That sai, the portfolo’sinflation-protected bond fund, Harbor Real Return, tke other long-term Treasury Infstion-Protected Securities funds, cares a formidable level of interest-rate sensitity. It dropped more than 7% when yields jumped up dunng the second quarter ana snatner 2% in the fourth quarter. Im competed by Vanguard's esearch that that level of interest-rate sensitivity obscures the ifiation protection that such instruments are supposed to bring to the portfole. Thus, I'm swapping In Vanguard's relatively new short-duratio lniation- protected index fund In place of the longer-duration Harbor Fund. (Duration is a measure of interest-rate sensitivity.) The short-term Vanguard fund delvers the desired inflation protection without the extreme rate senstvty that accompanies longer-duration TIPS. Bucket 3: Years 11 and Beyond original Portfolio. + $100,000: ® Vanguard Total Stock Market Index (VIS) + $400,000: © Vanguard Dividend Growth (VDIGK) + $200,000; © Harbor International (HAIN) + $125,000: © Loomis Savles Band (LSBDX) + $75,000: © Harbor Commodity Real Return (HACM) Adjustments: None ‘The long-term, stockcheavy plece of the portfolio remains unchanged. Due to an anchor position in Vanguard Dividend Growth, the portfolio has a high-quafty tit ‘that's appropriate fora retirement portfolio. That fune's newly arved investors may be feeling somewhat cismayed that recent performance has been undistinguished, but menager Don kibride's strategy tends to eam ns keep over a ful market cycle rather then during bull markets. A smaller position in Vanguard Total Stock Market Supplies exposure to sectors that tend to be underweight in the Vanguard fund, 1m 280 confortabie with Harbor Intemational despite the impending retirement of one of Rs comanagers, as the remaining three managers are experienced and have been steeped in the fms dscipined, value-ontented approach. [And even though Ive previously voiced concem about investors’ stampede into higher-yielding bond market sectors, Im not inclined to reduce the position m Looms Sayles Bond at this point, For one thing, wee holding the fund with at least a 10- year time horizon in mind. Moreover, Tlie the fact that the fund isnt wedded to a single nsly sector; ts managers can venture into freign-currency-denominated bonds, convertibies, high-yield bonds, and even stocks. Performance Due to strong equity market performance, the portfolio has generated strong absolute retums since its launch, gaining approximately 15% since ft frst appeared in August 2012. (That Figure includes reinvested dividends, income, and capital gains Astributions and does not include any portfolo withdrawals.) The portfolio has also performed a touch better than a custom benchmark of basic Index funds miorng ts asset allocation; that custom benchmark has gained 14.8% during that same time frame, Loomis Sayles Bond's return boosted the fixed-income partion of the portfoto, offsetting losses in Harbor Real Retum. Harbor Intemational alo outperformed 3 broad foreign-stock index fund during this (admittedly arbitrary) time frame. However, t bears repeating that the idea Isnt to shoot aut the lights with performance but rather to lustrate the merits of bulding a wel-diverstied totale return portfolio for retirement Hear more retirement insights from Christine Bene during the Morningstar Individual Investor Conference. Saturday, March 22. Register Now. Gee enn eRe O et nes eect Commenter 0a Comments) pines morringstar comarticlenalaricle aspx 625019 ‘Today's Top Credit cards How fond the best creck card for your testy Peking A Hote! How 9 pick your next hotel stay Prepare For Retirement & ‘More than SoM of retrement age inaviduae ito not have enough savings load crea? Pind outathat Would aflect your Creat Score BuaLink Now uve Link Now ‘Sponsor Center (eaesera ‘TRowePtice’ D Amerttre © tev i HF 2a Cards Today's Top Creat Cards So ‘TRowePrice’zara ‘An Aggressive Retirement Portfolio in Buckels ‘andrewxnn {Question the wisdom of Harbor Comedy Real Return (HAGHX). Feb 18 2014, 7:40 PM Nice eancept, but performance has been disappointing over neatly every pee. “ 1s basicaly just a trading strategy that somebody gets paid bike {] 0.96% annual t cary out. Tere has been no real growth of any business. also, notice the Negative Sharpe for 3 years ané not Gottins ve been taking MRD fr 7 out ofthe past 8 years (with required Feb 16-2014, 4:20PM distributions waived in 2008), ang have found the bucket system to be very helpful hold 4 years of MAD's in bucket 1, allocated Fe * to cash, and take my alstroutions from that bucket. thus during ure {0} the recent recession, I was able to maintain my equity positions, which have recovered nicely. Refllad bucket I with my bond holdings earlylast year before the drop in valuations. beeen Why are you not using ETFs for taxable accounts? Seems to me Feb 18 2014, 6:51 AM using gular mutvel funes means siting off mare texabe fivdend income at a tine when taxes should be minimized. fo, fom the way thi aride i wordeg, & appears to assume tike {Z]) the investor is retired. If 50, ‘ant it of prime concern to use dierent approach for those assets in tax-deferred accounts (ORR, Rollovers, Roth's) than non TRA accounts? Aer al the person is going to be forced to take ctnbutions By age 70 1/2. Fag cohtuseek ‘There are so many beter choices, espectaly for 8 3 Feb 17 2014, 5:24 PM Foo Uke £2] bogazith P)-Go08 question Feb 17 2014, 10:52 46 ba canary For intation protection have you real nvestigated the merts of Feb 17 2014, 12:58 AM investing in commodtties as compared to investing in commodity reg stocks in the madern eran which contango i the rule i flutes bored commocity vestments? Im certini no exper inthis ike (2) ‘area but the advice I glean from those with experience in the commocity markats suggests that long term buy and held investments in 8 rons basket of eammodtis in an ers of Widespread contange may net even produce a pasttve return aver long holding periods whereas investing in commodity stocks ‘or commodity stock funds can produce postive retums forthe buy and hold investor over long periods, even when commodities have a negative retin over the same long tne frame. The posite returns seen for some commodity funds may be largely due tothe band component in tse funds. Until you can provide evidence that commecity funds can beat the returns of cammasity stocks inthe era of contango, my eommadty elated Inflation protection will remain equal investments PGNAXRSNRX, and FSOPX which together provide a balances Investment in energy and materials stocs. {lm these investments to 2% of my portale as would ako be the case HT were investing in a pure broad commodty fund because of the ‘extreme voatity of these investmants use other inflation fignters, namely teal estate, @ small alcation te nen-futures based gold, ane predommartly [bonds for the rest ofthis intation Fghing pert of my retirement portoko stephesthe ‘would appreciate an arte on how to manage the effects on 8 Feb 16-2014, 2:05 PM bucket system, of withdrawals from a Balanced fund during oa retirement, have chosen 2 balanced fine (OOOB%) as the core holding for my retzement pertfola and Nolita 2 457 account, une {o] Which alo contains 2 stable value fine and a conservative Terget ete Fund. Talse hols equity and bond Roth funds. ! amin my seventh ipsinous. morning sta.comvar cleric aspre=638018zara ‘An Aggressive Retirement Portfolio in Buckels ear of retrement ang haven't nad to withdraw any of my tax- sheltered investments because alrost all expenses are coveres bya defined benett pension ane Socal Secunty. Ihave been harvesting at a rate of approx 2% of the coral portfole from the non-sheltered accounts. However, RKO willso0n be knocking on ‘the coor. When I start taking the withdrawals from DODBK, that willchenge the equity/bens balance on the whole patito, not Just DODBX. So far the only thing tve been able to igure isto set Up @ M* poroio that shows ALL the holdings and do 8 sem= annual review using X~ay to determine #1 need to rebalance closer So, the end ofthe so-called commalty “supereyde" apparently Feb 16 2014, 10:14 AM wasn't wortny of consideration In reducing or (better yet) risa ‘arletely eliminating the poralo'sallcatin to Harbor a Comedy Reo! Return, ater all's not Morningstar's money. ‘stu2e2 Thx -Imsinterprated what you were saying at Fst Feb 16 2014, 10:02 8M Fg ike rawon “Thanks Christine: these ates are always very helpful. For Feb 15 2014, 5:04 PM those who woul lke to simplty he “bucket” system. ! would use Fina TRP Spectrum growth (oregx) for Bucket 3.98 it very diversified “han fellow Corstine's recommendations for buckate 182 or how tke {o)] lever you want to construct them at a8 Comments | Please login or register to post a comment, Scan act Site Directory Ste Map Our Products Corrections Help Advertising Opportunities Licensing Opportunitias Glossary RSS Mobile Portfllo Affliate. 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