9 radical recommendations for your retirement portfolio
Reprinted courtesy of MarketWatch.com
Published: Dec. 18, 2013
To read the original article click here
As I’ve written before, I think it’s unfortunate that so many investors are relatively lazy and willing to take the easy “mainstream” road as described and recommended by big, reputable companies like Vanguard and Fidelity.
After all, if the supposedly best brains in the business say you can meet your goals simply using a single fund, why not?
Why not indeed? I think the main “why not” is that when you do that you leave money — sometimes a lot of money — on the table. In other words, considering the amount of risk you are taking, you don’t get the return that could (and should) be yours.
How you get that return is by owning a handful of carefully chosen funds that give you the right ingredients for a hardworking portfolio.
The easy, mainstream alternative is a target-date retirement fund such as Vanguard Target Retirement 2060 VTTSX, -0.49% (if you’re 40 or more years from retirement). Such a fund will relieve you of any burden of choosing asset classes and changing those choices as you get closer to retirement age.
That may give you peace of mind. But it won’t give you the full return you should have for your hard-earned savings. I hate to see young investors shortchange themselves, so today I’m outlining nine strategies that diverge from that mainstream approach. These “radical recommendations” are designed specifically for investors in their 20s and 30s.
(That said, some elements of these recommendations are likely to benefit investors of all ages.)
In the following list, I’m proposing ways that young investors have the highest probability of being able to retire early or retire comfortably (or both) and of getting the best possible return no matter what twists and turns the market takes. These suggestions aren’t made casually. Each one is based on lessons that have been taught by many years of history.
1: Skip the bond funds
Put all your money into equities for long-term growth. This should not be radical for young investors, but it certainly diverges from the mainstream model as reflected in target-date funds. Vanguard 2060, for example, contains 10% in bond funds. This isn’t enough to provide meaningful bear-market protection, but it’s enough to significantly reduce performance during bull markets like the one that we have been enjoying for nearly five years. I believe that investors give up about half a percentage point of long-term return for every 10% of their portfolios is in bonds.
2: Make a 20-year commitment to an all-equity portfolio
This sounds quite radical, but is it really so bold? From everything I know about the past, there has never been a 20-year period in which a well-diversified portfolio of bonds has had better performance than a well-diversified portfolio of stocks. This recommendation puts history on your side.
3: Invest half your money in value stocks
This may feel radical because it will make your portfolio different from the Standard & Poor’s 500 Index SPX, +1.06% and most other popular benchmarks. Vanguard 2060 has only a third of its equity portfolio in value stocks. However, value is Warren Buffett’s favorite asset class. This recommendation puts Buffett on your side.
4: Invest half your money in broadly diversified small-cap stock funds
If you do this and then look at the details of the stocks you indirectly own, it will feel radical. You won’t recognize most of the company names. (Vanguard 2060 has less than 7% of its equity portfolio in small companies. But over long periods, small companies grow faster than large ones, and their stock performance reflects that. This recommendation puts long-term growth on your side.
5: Invest half your money in international stock funds
This defies a lot of conventional wisdom; Vanguard 2060 has only 27% of its equity assets in international stocks. Well over half of the world’s market capitalization is in companies based outside the U.S. This recommendation puts the world on your side.
6: Invest 10% of your portfolio in emerging markets stocks
As the name implies, emerging markets are regions and countries that aren’t fully developed. Latin America, parts of Asia and Europe, Africa — all these may seem scary places to invest, and I’m recommending more than twice the exposure you’ll get in Vanguard 2060. But even the U.S. was once isolated and had little to show for itself other than lots of potential. Over time, new areas — like new companies — emerge to take positions of prominence. This recommendation puts the future on your side.
Each of these six recommendations is radical all by itself. My next suggestion puts them all together. This may seem extreme to people who are unfamiliar with my previous work. But it’s something I have been advocating — and following myself — for nearly 20 years.
7: Make a 20-year commitment
Make a 20-year commitment to an all-equity portfolio that’s half in value, half in small-cap, half in international, including 10% in emerging markets. (And if your portfolio is tax-deferred, include 10% in real-estate investment trusts.) I call this the Ultimate Buy and Hold Strategy, and my previous article tells you how to implement it. This recommendation puts just about everything on your side: Warren Buffett, the whole world, the past and the future!
OK, can I top all that with two more recommendations that may be even more radical? That’s a tall order, but based on some ideas I got in a long conversation with my son (and my former boss), Jeff Merriman-Cohen, I believe I can fill it.
8: Pure value
This could be called “really radical.” Own only value stocks. No blend funds or growth stocks. This is perhaps a “pure Warren Buffett” approach. You can implement this including international funds as well as U.S. funds and including small-cap funds as well as large-cap ones. Most advisers will try to talk you out of this, but I think it gives young investors a legitimate shot at really superior long-term returns.
9: Think small
Finally, here’s one that could be described as “beyond radical,” though I don’t think’s really off the deep end. Implement No. 8, all value, and weight your portfolio two-thirds to small-cap funds and only one-third to large-cap ones. I don’t think most advisers would condone this approach. But if you have 20 or more years until you need to start pulling back to become conservative, I think this puts all the probabilities in your favor. If I were in my 20s and less risk-averse than I am (and knowing everything that I know now), I would be tempted to follow this path.
I cannot predict the future, of course. But from everything I know, I believe that if you follow one or more of these recommendations, over a period of 20 years or more you are likely to boost your annual return by 1 to 2½ percentage points. Depending on how much you save and how long you stick with these recommendations, this could put hundreds of thousands of additional dollars into your retirement fund.
The best part is this: I don’t believe these recommendations involve excessive risk for young investors.
Richard Buck contributed to this article.
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