A Model Portfolio for Weathering Retirement
by Ben Stein
Dow Jones 30 Industrials made up of 30 of the largest firms
The index that tracks real estate investment trusts (or REITs)
IWN OR VBR
The Russell 2000 Small Cap Value, or the Vanguard Viper fund
Index fund of European, Australian, and Far Eastern stocks
Index of stocks in developing nations
Goldman Sachs commodities fund
The Canadian iShares
It’s impossible to think of this past summer and the current fall without
thinking of storms.
Hurricane Katrina, the biggest disaster to hit New Orleans in at least 75
years, and Hurricane Rita, which caused probably the worst traffic jam in
U.S. history, preoccupied the nation and the world.
But a truism kept occurring to me all through the storms: Those who prepared
got off relatively cheap. Those who had an evacuation plan, plenty of canned
food, flashlights, medicines, and batteries got away from the storm or
weathered it while others struggled.
The hurricane that's coming now is called retirement. It's a storm that's
been forecast over and over and it's bearing down on 78 million baby
boomers. For most of them, the preparations have been pitifully small.
We have a basic idea of what should be included in a hurricane disaster kit,
but do we know what to have in our portfolio of investments for retirement?
This column is going to start forthwith a heavy deluge of advice about what
should be in that portfolio.
First, the portfolio should be different for different age groups. If you’re
in your 70s, you should have a portfolio that is far more conservative than
someone in their 20s who can afford to ride out ups and downs in stock
prices. Even if you’re middle aged, you’ll want to have some fixed income
(usually bonds) that can be counted on to pay out a regular stream of
coupons whether the stock market goes north or south.
But just this one time, let's assume you have only notched maybe 30 or so
years on the calendar. You’re pretty much a beginning investor. Your biggest
earnings years lie ahead and so do your biggest spending years as you pay
for your kids' educations and your bigger homes.
At age 30 or so, you might well want a portfolio of almost all common
stocks. These tend to give the biggest long-term rewards, although there
have been long periods when they have languished, as in the Great Depression
and some time afterwards. But in the past 50 years their returns have been
superb. While those perfect, balmy days are probably past, common stocks'
returns will beat anything else even if they are only half as good as they
have been in the past.
Now, let’s get down to specifics.
Maybe about 30 percent of the total you have to invest should go to
so-called “spiders (SPY),” ( http://finance.yahoo.com/q?s=spy ), a low cost,
highly tax efficient index of everything in the S&P 500 made up of the 500
largest industrial firms in America. An index is an unmanaged fund of stocks
chosen by certain fixed characteristics. In the case above, the
characteristic is large capitalization.
Then you might have about 10 percent in so-called “diamonds (DIA),” (
), an index that covers the Dow Jones 30 Industrials made up of 30 of the
largest firms in America. Because they have fewer volatile technology firms,
diamonds tend to fluctuate less than spiders.
Then, since research clearly shows that small-capitalization stocks do
better over very long periods than the S&P 500 but with a bit more
volatility, 15 percent in an index of small-cap stocks. The two often used
are the IWN ( http://finance.yahoo.com/q?s=IWN ) , which is the Russell 2000
Small Cap Value, and the VBR
http://finance.yahoo.com/q?s=VBR ) , the
Vanguard Viper which has similar characteristics but some say offers more
stability in its holdings. Whichever index you choose, remember small-cap
stocks are for holding for very long periods.
Then you might want to have 15 percent in the EFA (
, which is an index fund of European, Australian, and Far Eastern stocks,
usually of very large capitalization. These offer a chance to get in on
I’d also suggest about 10 percent in the EEM (
, which is a popular index of stocks in developing nations such as Brazil,
India, China, Thailand, and others. These stocks have been red hot lately as
the developing world explodes with growth, but they usually offer a choppy
ride. Results such as those of the past few years are not to be anticipated
again for a time, but when they come, they come like thunder.
Then, since many experts believe high commodities prices are here to stay,
you might want an index that collects commodities related stocks. Here, I’d
recommend that you put about 5 percent of your holdings into each of the IGE
( http://finance.yahoo.com/q?s=IGE ), the Goldman Sachs commodities fund,
and 5 percent in the EWC ( http://finance.yahoo.com/q?s=EWC ) , the Canadian
iShares, an index of Canadian large-cap companies weighted about 25 percent
in commodities. Canada is a very large exporter of oil, will be a bigger one
in the future, and is loaded with commodities of all kinds. It is also a
play on the strengthening of the Canadian dollar, which seems to me an
inevitability considering the power of their exports in commodities.
I might put the rest in the ICF ( http://finance.yahoo.com/q?s=ICF ) , which
is the index that tracks real estate investment trusts (or REITs). Its
future is not going to be as good as its recent past, which has been
stellar. But it pays a good dividend and will go up as the real estate boom
slows and as tenancy of office buildings grows -- both of which may well be
in the cards.
The keys here are diversification, exposure to all parts of the market, and
allowing long term trends -- growth in the developing world, fall of the
dollar, endless demand for energy commodities -- work for you.
Obviously, you should have at least six months' expenses in cash for
We’ll get to fine-tuning and different portfolios for different ages in
future columns, but this is a good start.