My currently favored portfolio in larger retirement accounts (IRA's and SEP Ira's) I oversee (family only) consists of four mutual funds, each of which paid over 5% over the past year including 2008 to date. They are VWIAX, LSBDX, PCRIX, and RPSIX. I have owned all four of these myself for some time, and I have discussed them in depth recently several articles down the blog page from here. For purposes of keeping track here, one would divide the total cash available for such an account by six. I have two 1/6ths (1/3) in both VWIAX and LSBDX, and 1/6 each in PCRIX and RPSIX. For smaller accounts one could use the lower entry minimum fund classes of VWINX, LSBRX and PCRDX. For RPSIX there is only one class. I will re-balance these funds periodically, and I plan to hold these funds unless any fund suffers an adverse outcome like a key manager departuture or a unusual performance failure.
Using the FastTrack total return data base and chart service, the above allocation's total return for the past year to January 18, 2008 was 10.89% including both capital appreciation and with all dividends re-invested. Since in my own accounts I am drawing down retirement income, I do not re-invest the dividends, but have them put into the Vanguard Prime Money Market fund which in turn deposits a fixed amount I have chosen for each month this year into my bank checking account.
The 1/6th contribution of PCRIX to the combined account's real return was enormous this past year as inflation in commodity prices accelerated and US Treasury TIPS rose for the same reason. This fund has both a commodity and a TIPS exposure. The fund also paid over a 5% cash dividend, largely from TIPS interest.
Since December 31, 2007 to January 18, the portfolio is up at an annualized rate of 5.995%, up again due to the contribution of PCRIX.
On the chart I also show VWALX the Vanguard High Yield Municipal Fund which is one of several muni funds I use in my own taxable accounts. I do not reinvest the interest in the muni funds which keeps bookkeeping and taxes simpler and far less. Right now municipals are coming back into favor as people contemplate both the 2008 US elections and the scheduled expiration of quite a bit of the Bush tax cut package.
For purposes of comparison only I also included on the chart the Vanguard Admiral SP500 fund VFIAX, also with total returns after dividend re-investment. I do not own this fund. It is down -5.47 over the year, most of that of course in 2008. VFIAX is down at an annualized rate of -86.08 since December 31, 2008.
The four fund income portfolio may not be a portfolio that everyone in or near retirement would feel comfortable with, but it does and has thrown off good income while preserving enough stocks (14.7%) and commodity and TIPS exposure (16.7%) to try to stay ahead of inflation. Consider the portfolio as an example of what one can do. The stocks in VWIAX are partly large foreign stocks as well as US stocks in its 35% stock allocation. PCRIX could be a drag in a disinflationary environment. Two thirds of the account is in bonds of all sorts as I have also discussed recently down the page.
My goal of investing near or in retirement is not to accept much risk of a major loss of capital while still having some protection against inflation. PCRIX or its higher cost but lower required minimum cousin PCRDX will help and so will the small exposure to dividend-paying global stocks (but largely US stocks) in VWIAX and RPSIX.
There is another risk in retirement that I have covered on the blog several times in 2007. Namely, that is the risk of falling interest rates. Obviously if rates go down over a period of time, your bonds will increase in price, but you need the income too to live on. For myself and family I purchased an immediate annuity (NOT a variable annuity) with some after tax cash which guarantees a fixed payment per month for the life of my spouse and me, regardless of interest rates. It's like a traditional corporate pension. Read the article back a few months ago for details. It's only a partial solution, but it locks in an interest rate on part of your funds just as PCRIX guarantees to try to protect you from inflation on your income account. If you buy an immediate annuity with after tax dollars, a large portion of the payments are tax-free. With the funds in an immediate annuity you are on autopilot. The mutual funds income account can be changed for as long as you wish or are able to continue management.
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