Retiree Portfolio Update

Now that I've made, or at least set into motion, a few pivotal decisions, finally have I found a smidgen of time to resume constructing "The Retiree Portfolio."

Meanwhile, while I was slammed with other, more pressing life obligations, to stave off any issues of having the portfolio lose out on any market gains, while simultaneously softening any disastrous blows that could come from sharp market declines, here's what I did:

The total portfolio is split roughly 50/50 between a traditional IRA account and a regular mutual fund account.

As of March, 2007, the retiree also contributed into a new Roth IRA account.

(Speaking of Roth IRA's, one significant mistake we'd made months ago was, in our mad frenzy to consolidate all of the retiree's Roth accounts, more than 5 total accounts-- and I lost count, we'd pulled all Roth IRA funds out and held it in the retiree's usual bank checking account. This was withdrawn without penalty. Even so, HUGE mistake. What we should've instead done was taken the time to combine all of several Roth IRA accounts into simply one Roth IRA account. Oh, well.)

The default, universal rule was to let all of the assets, regardless of account or intention, sit in the highest-yield, least-riskiest fund by default. That default was Vanguard's Prime Money Market Fund (VMMXX) with a yield of 5.09% (IIRC). Being a California resident, we calculated the tax equivalent yield between the California Tax-Exempt Money Market Fund offered (which is exempt from federal *and* state income tax) and the Prime Money Market. We found the Prime Money Market offered superior returns, for the retiree's tax bracket.

For the traditional IRA, 100% of the amount has been sitting in a blend fund, the Vanguard Wellington Fund (VWELX). Here's a rundown of the fund's strategy and policy:

Investment strategy

The fund invests 60% to 70% of its assets in dividend-paying, and, to a lesser extent, non-dividend-paying common stocks of established medium-size and large companies. In choosing these companies, the advisor seeks those that appear to be undervalued but to have prospects for improvement. These stocks are commonly referred to as value stocks. The remaining 30% to 40% of fund assets are invested mainly in investment-grade corporate bonds, with some exposure to U.S. Treasury and government agency bonds, as well as mortgage-backed securities.


Investment policy

Although the fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Such securities are subject to country and currency risks.
The fund may invest in securities that are convertible into common stocks, as well as invest modestly in collateralized mortgage obligations (CMOs).
The fund may invest, to a very limited extent, in derivatives. The fund will not use derivatives for speculative purposes or as leveraged investments for the purpose of magnifying losses or gains.

What I like about this fund as a temporary stopgap because I was very short on time, but high on responsibility, for constructing the portfolio is that its makeup contains most of the vital characteristics that form the foundation of my future portfolio:

- It contains a roughly 60/40 ratio of equity and fixed income.
- Its expense ratio is very low for an actively managed fund: Expense ratio as of 11/30/2006 0.30%.
- It seems to focus on value equity.
- VWELX performed remarkably well, essentially experiencing minimal value depreciation, during the years 2000-2002 bear market.

For the regular mutual fund portion of the retiree portfolio, 20% of this portion was invested in VWELX as well. Another 20% was used to purchase Vanguard Total Stock Market Index Fund (VTSMX) on 2/23/2007. On 3/2/2007, after the recent significant 1-day stock market correction, I used another 2% of this portion to purchase more VTSMX shares.

The remainder of the regular mutual fund portion sits in VMMXX.

Now, what does my ultimate composition for the retiree portfolio look like? I don't have the final answers yet as I (hopefully) wrap up the final breakdown by this weekend, but it'll have the following characteristics:

- It will attempt to achieve a 60/40 equity/fixed-income ratio.
- It will be value tilted, but not as significantly as some other portfolios I've seen on the 'Net.
- It will loosely comply with the total world allocation portfolio, which breaks down the whole world's equity worth by country. Very roughly, I believe that ratio is close to a 50/50 US/Int'l ratio. What this means is I want the eventual portfolio to try to achieve a 50/50 US/Int'l equity ratio as closely as possible.
- I hope ultimately I'll be able to slice-and-dice the international equity portion of the portfolio.
- The fixed-income portion will contain no bonds > 5 years in maturation.
- The portfolio will be sliced-and-diced as much as reasonably possible.
- The portfolio will only be rebalanced once annually.
- Equity index funds will go into the taxable account, whereas fixed-income / bonds will reside in the IRA.
- REIT's will compose at most 10% of the whole portfolio.
- I'm still debating whether to include commodities or not.

So, for now, what does the retiree portfolio, constructed in the laziest of ways, look like overall?

Short-term reserves: 34.9%
Bonds: 19.6%
Stocks: 45.5%

The basic asset allocation isn't actually too far off from what I ultimately want to achieve. Not too shabby for, say, 30 minutes' worth of work, 2 months ago.

How has it done? Anecdotally and generally speaking:

- After the market correction @ the beginning of March 2007, I believe the portfolio only decreased by half the percentage that the S&P500 declined by.

Not bad at all. All that's left is to fine-tune percentages, pick the ideal funds, define an entrance strategy (shotgun, DCA, or VA?), and execute.

To be continued...