Low-Risk Fund Portfolios

7/18/2016


Q You say your Conservative Portfolio is designed for investors at or near retirement. What funds would you suggest for an investor well into retirement who is looking to stay ahead of inflation without taking much risk?

A With bond yields near all-time lows, "locking in" a decent return from a low-risk retirement portfolio has seldom been tougher. With that in mind, we created three fund portfolios with low expected volatility, limited stock-market exposure, and yields of at least 2.2%.

The portfolios hold 13 to 16 funds, including 12 from our recommended list, and favor low-cost funds from Vanguard. Bonds account for 39% to 73% of the portfolios, with at least 89% of the fixed-income holdings in investment-grade bonds. U.S. stocks — mostly large-caps — represent 18% to 51% of the portfolios and foreign stocks about 5%, plus at least 3% in cash.

As presently constructed, the low-risk portfolio would have returned an annualized 5.6% for the 10 years ended June. The moderate- and higher-risk portfolios would have risen at annual clips of 6.2% and 6.6%, respectively. During that span, the S&P 500 Index rose 7.4% and the Barclays U.S. Aggregate Bond Index returned 5.1%.

To be sure, the portfolios aren't insulated from volatility — the biggest contributor to risk is stock-market exposure. All three portfolios suffered during the financial crisis in 2008. Over the last 10 years, the low-risk portfolio's weakest 12-month performance was a 13% decline, versus drops of 21% for the moderate-risk portfolio and 29% for higher risk.

Also, past performance may be difficult to match. Today, the 10-year Treasury note yields only 1.4%, down from 5.2% 10 years ago, while richer valuations point to muted stock returns. On average, S&P 500 stocks trade at 22 times trading earnings, up from 18 in 2006.

Assuming that foreign stocks return 2.7% and U.S. stocks 4.9% — half of what they've done over the past 25 years — and that the bond funds deliver returns that match their yields, the low-volatility portfolio has an estimated return of 2.6%, compared to 3.1% for moderate risk and 3.6% for higher risk.

FUND PICKS FOR LOW-RISK PORTFOLIOS
For cautious investors well into retirement, we constructed three fund portfolios with low expected volatility. Investors wishing to mimic the portfolios should purchase the funds listed below in the proportion suggested by the target weights. While not immune to volatility, the low-cost portfolios sport yields of at least 2.2% and the potential for steady returns. Investors who can tolerate slightly higher risk should consider our recommended Growth and Conservative portfolios
---------- Target Weight ----------
Fund (Price; Ticker)
Low
Risk
(%)
Moderate
Risk
(%)
Higher
Risk
(%)
Yield
(%)
Expense
Ratio
(%)
Baird Core Plus Bond ($12; BCOSX)
16
12
8
2.4
0.55
Fidelity Overseas ($40; FOSFX)
3
4
5
1.1
1.04
Fidelity Select Utilities ($77; FSUTX)
3
4
5
1.8
0.80
Vanguard 500 ($199; VFINX)
7
7
13
2.0
0.16
Vanguard GNMA ($11; VFIIX)
7
5
3
2.4
0.21
Vanguard High-Yield Corporate
($6; VWEHX)
5
5
4
5.6
0.23
Vanguard Inflation-Protected
Sec. ($14; VIPSX)
7
5
3
0.7
0.20
Vanguard REIT Index ($30; VGSIX)
3
4
5
3.2
0.26
Vanguard Selected Value
($27; VASVX)
0
4
7
1.8
0.39
Vanguard Short-Term Federal
($11; VSGBX)
8
5
3
1.0
0.20
Vanguard Short-Term Invest.-
Grade ($11; VFSTX)
16
12
8
2.0
0.20
Vanguard Small Cap Value
($26; VISVX)
0
4
7
2.3
0.20
Vanguard Total Bond Market
($11; VBMFX)
15
10
6
2.3
0.16
Vanguard Value ($34; VIVAX)
0
4
9
2.4
0.22
Vanguard Wellesley Income
($26; VWINX)
5
7
7
2.9
0.23
Vanguard Wellington ($39; VWELX)
5
8
7
2.6
0.26
Statistical comparison
10-Year *
-- (Annualized) --
Worst Perform.
Last 10 Years
------------ Allocations ------------
Total
Return
(%)
Standard
Deviation
(%)
3
Mos.
(%)
12
Mos.
(%)
Cash
(%)
U.S.
Stocks
(%)
Int'l
Stocks
(%)
Bonds
(%)
Est.
Yield
(%)
Low-risk portfolios
Low risk
5.6
4.8
(10.9)
(13.0)
5
18
4
73
2.2
Moderate risk
6.2
7.2
(16.0)
(21.2)
4
34
5
57
2.3
Higher risk
6.6
9.9
(21.1)
(29.4)
3
52
6
39
2.3
Our recommended portfolios
Conservative
6.8
12.5
(26.9)
(35.6)
3
58
14
25
2.0
Growth
6.8
13.9
(29.4)
(38.8)
3
64
17
16
2.0
Popular indexes
Barclays US Bond
5.0
3.2
(3.2)
(2.5)
0
0
0
100
2.3
S&P 500 Index
7.4
15.2
(29.7)
(43.3)
0
100
0
0
2.2
MSCI EAFE
1.9
18.6
35.4
(50.2)
0
0
100
0
2.7
* Historical returns reflect portfolios as presently constructed.

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