How do you actually manage your investment portfolio in a real-world retirement? Nearly every prospective or current retiree has this question. And there are lots of answers out there….
The article I wrote at the end of 2012 disclosing my actual investment portfolio has been in the Top 10 Popular Posts here for most of the year. Even though I’m not dispensing investment advice, and don’t necessarily recommend some of my particular holdings for others, people seem to benefit from reading about my experience.
So, here is an update on the state of my portfolio for the new year. Below I’ll review my holdings, outline my asset allocation, and discuss the investment moves I made during the past year. Finally, I’ll reveal my portfolio’s performance for 2013, and discuss why the relatively poor showing doesn’t have me worried….
Before we get started, let me get a few caveats out of the way:
I’m not recommending specific investments here, much less an entire portfolio.
Portions of my portfolio stretch back almost two decades and aren’t exactly how I’d build one today. There are some actively managed funds and some commodity positions that I wouldn’t recommend to a new investor.
Even though my portfolio hasn’t changed much in recent years, I can’t promise that I won’t change it in the future, or that I’ll necessarily post my changes to this blog in any kind of timely manner.
That said, let’s look at the numbers….
Those who understand my investing philosophy shouldn’t be surprised to hear that my portfolio has changed very little since late 2012 when I wrote that last article. The allocations are a bit different, because the market has shifted, and I added one balanced, low-cost fund to hold proceeds from the sale of our house. But, otherwise, it’s a familiar picture:
|Fund||Symbol(s)||Percent of Portfolio|
|Vanguard Wellesley Income||VWINX/VWIAX||31.5%|
|Vanguard LifeStrategy Moderate Growth||VSMGX||16.0%|
|Vanguard Total International Stock Index||VGTSX/VTIAX/VXUS||10.4%|
|Vanguard Total Stock Market Index||VTSMX/VTSAX/VTI||7.7%|
|Vanguard Inflation-Protected Securities||VIPSX/VAIPX||4.7%|
|Vanguard Intermediate-Term Treasury||VFITX/VFIUX||3.9%|
|Vanguard Short-Term Investment-Grade||VFSTX/VFSUX||3.9%|
|SPDR Gold Shares||GLD||5.2%|
|Third Avenue Real Estate Value||TAREX||5.8%|
|T. Rowe Price New Era||PRNEX||3.8%|
I described most of these funds in more detail in my previous article, and the information is available online, so I won’t repeat it here.
But let me say a word about the Vanguard LifeStrategy Moderate Growth fund (VSMGX), which I added this year. This is a diversified, all-index, fund of funds that can be viewed as an all-weather, complete portfolio in itself. Vanguard’s family of LifeStrategy funds allows you to tailor your personal time frame and risk level. The Moderate Growth fund features a mainstream allocation of about 60% stocks/40% bonds.
I referenced this excellent fund in my guest post for Oblivious Investor a while back, and have had my eye on it ever since. And this year, thanks to our house sale, I got to put my money where my mouth was, and actually use it!
Given the new fund, and inevitable market shifts, our current overall asset allocation is similar to last year, though our stock allocation has drifted about 5% higher:
|Asset Class||Percent of Portfolio|
I’m OK with that somewhat higher stock allocation. That’s partly because I question the merits of rebalancing, and partly because I believe that a substantial stock allocation is necessary to ensure the survival of your portfolio through an extended retirement. But, if and when I need to raise cash for living expenses this year, I’ll most likely be selling stocks.
Activity Last Year
Last year, 2013, was a typical slow year in my investment accounts. Essentially, I made just six trades, though a few of these were split into multiple transactions. Altogether there were several exchanges — mostly for rebalancing, a purchase with new money, and a couple of modest sales — to generate cash for living expenses.
Here is what I did and why I did it:
- Exchanged the Vanguard FTSE All-World ex-US Index (VFWIX/VFWAX/VEU) for Vanguard’s Total International Stock Index (VGTSX/VTIAX/VXUS). I can thank blog readers for this move. I had been holding the FTSE All World ex-US because, at one time, Total International didn’t have any exposure to Canada. But Vanguard changed the underlying index used by Total International in 2010. The two funds are very similar now. The main difference I can see is that Total International has exposure to small cap stocks. I like the diversification, so I switched to it. And this was a retirement account, so there were no tax implications to consider.
- Used most of the cash from our house sale to purchase Vanguard LifeStrategy Moderate Growth (VSMGX). I debated whether this money should go into a real estate investment, but ultimately decided that I didn’t view my house that way, so I would stick close to my existing asset allocation. Because I already had a high percentage of our investment assets in my “go-to” Vanguard Wellesley Income fund, but have a few reservations about it, I chose the LifeStrategy Moderate Growth for this chunk of money. There is more about that decision and the two funds in “Putting Our New Cash to Work” in my post Investing in Real Estate.
- Moved a little less than 1% of my total portfolio from Vanguard Total International Stock Index (VGTSX/VTIAX/VXUS) to Vanguard Wellesley Income (VWINX/VWIAX) — a small nod to rebalancing, given the rise in stocks over the year.
- Moved a little more than 1% of my total portfolio from Vanguard Total Stock Market Index (VTSMX/VTSAX/VTI) to Vanguard Wellesley Income (VWINX/VWIAX) — another nod to rebalancing.
- Sold SPDR Gold Shares (GLD) equaling about 2% of my total portfolio, throughout the year, generating cash to replenish our approximate 2-year cushion for retirement living expenses. (We’ve held our GLD for many years and it was all sold at a tidy profit, despite gold’s decline this year.)
- Sold Third Avenue Real Estate Value (TAREX) equaling about 1% of my total portfolio. We’ve owned TAREX for more than a decade, and it had double-digit returns the last two years — echoing the recovery in real estate. Again, this was to generate cash for living expenses.
Why did I choose these last two positions to sell? Because they have been enjoying banner returns and it looked like harvest time to me.
Though I’m no fan of trading, it is necessary to sell some assets to fund our retirement. And an iron-clad rule of successful investing — across nearly any investing philosophy — is to sell, if you must, when prices are high!
Overall, it was a dull year in my investing world. Which, when you are a conservative, passive index investor, is how almost all years will be.
Retirement Withdrawal Strategy
Some of you out there are probably frowning to yourselves: “Sure doesn’t sound like he has a system for living off his assets in retirement.”
You’re right, I don’t. Despite having read and written about many such systems, I don’t have one. I’d like to find a system, some day, but I’m not positive that will happen. Unless you can hold the world, and your life, constant for decades at a time, I think it’s going to be very difficult to design and stick with a single, optimal retirement withdrawal strategy.
However, I do outline the options in my post Retirement Withdrawal Strategies, and describe my approach, such as it is, there. I call it “Flexible Capital Preservation” — living off interest, dividends, growth, and some part-time work income, all with an eye to preserving assets in early retirement.
To conclude, let’s review investment returns — always interesting, but not always useful. When it comes to retirement, short-term returns don’t matter much: It’s how your portfolio performs over the decades that really counts. Nevertheless, I did compute my overall return like I do every year, and since it was relatively poor in 2013, I’m taking this opportunity to exercise some humility and also demonstrate the reality of living off a conservative portfolio in retirement.
So, my conservative portfolio returned only 7.3% last year, compared to more than 29% for the Dow Jones Industrial Average, dividends included.
Ouch. No bragging rights for me this year. Why did it happen? My portfolio is more than half bonds, gold, and cash. As interest rates began to rise and economic recovery appeared to take hold, those three asset classes had a terrible year, returning something like -2%, -28%, and +0.25% respectively. Those individual returns trashed my overall return, and they’re a good example of how investment losses can hurt more than wins help.
But, by definition, conservative investors are willing to give away some upside for the peace of mind ensured by less volatility and limited downside. They have the fortitude to endure tales of inflated short-term returns from their friends and the media, secure in the knowledge that their lifestyle will be protected in good times and bad.
So, will 2013 be a problem for us? Doubtful. A 7% return is not to be sneezed at: Anybody who’s run the numbers knows that you can live out a comfortable retirement given that kind of performance over the long haul. Of course it would be nice to grab more return in the good years. But I’ve watched essentially this same portfolio of mine for almost a decade, including around the punishing 2008/2009 downturn. The average of my annual returns over the last nine years has been about 7.5% — good enough to retire early and keep growing our portfolio. My holdings and asset allocation have behaved as expected, and stood the test of time. Think I’ll stick with the program….