Inflation hurts most investors and it really hurts most on fixed budgets.  It can absolutely annihilate retirees and those who are just about to retire.  Another consideration is that as investors get older, they generally have to start taking less risk for the peace of mind in capital preservation.  It turns out that peace of mind may be coming at far too high of a price for many who are retired or are soon to retire.  This week we are getting some feature reports and some recommended portfolio makeovers from Morningstar.

Christine Benz of Morningstar has a model portfolio, or a model portfolio makeover, for those who are close to retirement.  One such instance is a soon-to-be retiree who owns his house outright and with a personal goal for his investment portfolio to leave a legacy for his children rather than to fund near-term living expenses. 

This investor has far too much in cash (about 70% of assets) due to being nervous about the markets, there are CDs, and bonds.  Some funds held before the makeover are Vanguard Dividend Appreciation (VDAIX), the Vanguard Inflation Protected Securities (VAIPX) fund, a Vanguard Intermediate-Term Tax-Exempt (VWIUX) fund and the Vanguard Wellesley Income (VWIAX) fund. Needless to say, the income is extremely low.

Christine Benz argues that retiree portfolios with this goal in mind can have far more stock-heavy and longer-term asset portfolios if the day-to-day living expenses are not really an issue.  The portfolio maker still includes the funds mentioned above.  The difference is that the Vanguard Dividend Appreciation (VDAIX) fund is now more than 29% of the portfolio weighting versus only about 10% before. 

One fund which also added in to the portfolio is the Vanguard Total International Stock Index Admiral (VTIAX) fund, which invests in equity markets outside of the United States. 
Another addition is the Harbor Unconstrained Bond Fund (HAUBX), which invests in intermediate and longer-term bond issues, and it invests internationally and in junk bonds.

There is a key admission here that every investor has to consider with any large protfolio reallocation.  There is an understanding admission that both stocks and bonds are not cheap at the moment, so making shifts should be done over a long period of time rather than just all at once. 

More details on this portfolio makeover can be found here for Morningstar and there is also a coming event for a “Do Your Own Portfolio Makeover” as well.

JON C. OGG

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