From the February 2000 issue of the Alaska Airlines Magazine.
Worrying about investments is very low on the list of things people want to do when they retire. Ideally, retirees should be able to meet their income needs without eroding their principal, and that principal should have an opportunity to grow, at least in the good years. For some time I have been mildly obsessed with finding the very best combination of assets to achieve those results for retired investors. And I’ve found a combination that’s pretty hard to beat. From 1970 through 1999, it provided a compound return of more than 12 percent, at less than half the risk of the Standard & Poor's 500 Index.

Of the retirees and soon-to-be-retirees that we counsel, 95 percent could meet their objectives if they achieved a compound rate of return of 8 percent. But investing is not an exact science, so you’ve always got to build in a margin for error. One way we do that is to design portfolios that are likely to achieve returns of 10 to 12 percent annually. Even if 8 percent will do, this gives retirees a cushion of comfort.

The very best 10-percent-to-12 percent strategy we know provides income and a good shot at growth. It doesn’t go wild in a roaring bull market, and it’s relatively tame when the bears are out and the market’s going south. It’s based on the best academic research I’ve been able to find, and it’s easily customizable to fit individual needs.

This portfolio consists of 10 classes of assets (or 12, depending on how you count), and the best way to implement it is by using no-load mutual funds. We start by allocating 50 percent of the total to bonds. This provides stability to reduce the effect of the gyrations of the stock market. And over the years bond funds have provided compound total returns of 7 to 9 percent. Among our favorite bond funds for this purpose are three from Vanguard: Vanguard GNMA, Vanguard Long-Term Corporate and Vanguard High-Yield Corporate. Investing equally in those three would have given you a compound return of about 8.6 percent over the past 10 years.

The other half of our ideal retirement portfolio is in stock funds. History shows that over long periods of time, investors have received a premium over the returns of the S&P 500 Index by investing in international stocks, in small-company stocks and in "value" stocks, those that are out of favor for various reasons.

To take advantage of these premiums, we recommend splitting your stock investments equally between U.S. and international issues. Divide your U.S. stock investments equally in four funds: large growth companies, large value companies, small growth companies and small value companies. Internationally, divide your stock investments in five equal segments: large growth companies, large value companies, small growth companies, small value companies and companies in emerging markets.

For specific recommendations on how to implement this portfolio with no-load mutual funds available from Fidelity, Schwab and Vanguard, look in the Model Portfolio area of our Web site, www.FundAdvice.com.

 

 

 

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