Retirement investing is more of a challenge today than it used to be. Back before the financial crisis, the standard approach was to have a very hefty allocation to bonds, laddered across different maturities, earning different yields. That would be supplemented with some rock-solid blue-chip dividend stocks.
That’s not the case anymore. Bonds are not yielding very much, although that is starting to change. But with rates close to zero, retirement investors had to move further out onto the risk curve to get the same yields as they used to.
It’s worse than ever, now, because inflation is not the 3% the government claims. That’s because the government changed how it calculated inflation decades ago. Inflation is closer to 10%, and that means you have to allocate your portfolio accordingly.
Fortunately, the good people at Vanguard have a huge variety of retirement funds and ETFs to choose from. While choosing the exact funds or ETFs will depend on your situation, here are three Vanguard retirement funds, one for each type of investor.
Vanguard Retirement Funds for Conservative Investors
For the conservative investor looking for Vanguard funds, one choice is the Vanguard Intermediate-Term Tax-Exempt Fund (VWITX). There are a lot of things to like about VWITX, not the least of which is that it holds almost 7,500 different bonds. That’s right. So if some of the entities that have issued these bonds go belly-up, it’ll barely be a pinch to the fund itself.
The average maturity of the bonds in the fund is 9 years, although 45% of the fund’s bonds are for 10 – 20 years. It’s a bit longer than I’d like, but with fully 90% of the bond A-rated or better, VWITX is well-positioned.
The average coupon is a generous 4.7%, so on a taxable basis, you’re looking at something like 6% or higher depending on your bracket.
Most of all, I like the fact that the fund’s volatility rating is not terribly high despite being an intermediate-term fund. The 15-year average annual return is 3.85% with a standard deviation of the same. That means in any year, there is a 95% certainty that the fund will return between -3.85% and 11.55%.
Vanguard Retirement Funds for Aggressive Investors
For the more aggressive investor looking for Vanguard funds who need their portfolio to lean more toward growth, consider the Vanguard LifeStrategy Growth Fund (VASGX). The fund puts 80% of its assets in stocks, of which a portion is allocated to international stocks, and 20% in bonds, of which a portion is also allocated internationally.
The fund accomplishes this by actually just taking the money and investing it into other Vanguard funds that encompass the total domestic and international stock and bond markets. It’s actually quite a good allocation, and all for an expense ratio of only 0.15%. Since it throws off a 2.12% yield, that money covers the expenses as it is.
How does VASGX stack up in terms of its relative performance and volatility? The 15-year average annual return is 8.44% with a standard deviation of 11.94. That means in any year, there is a 95% certainty that the fund will return between -15.5% and 32%.
That’s a pretty wide range, and yet it’s not as broad as the S&P 500 and that’s the point. So the fund achieves its objectives by tamping down volatility with bonds.
Vanguard Retirement Funds for Moderate Investors
For the middle-of-the-road investor looking for Vanguard funds, there’s the Vanguard Tax-managed Balanced Fund (VTMFX). In this case, Vanguard places about half the assets into 880 stocks, most of which are the mega-cap well-known legacy names, with a few of the new FANG stocks in for good measure. About 20% of the stock assets are in financial services, another 2-% in tech, and 14% in consumer discretionary.
The remaining assets are 1800 tax-exempt bonds, with an average stated maturity of 9 years, an average coupon of 4.7%, and over 90% of which are A rated or better.
So with VTMFX, you are giving up the taxable dividends while getting the benefit of tax-exempt muni bonds.
As you would expect, the risk ratings are right in the middle. The 15-year average annual return is 7.3% with a standard deviation of 6.8. That means in any year, there is a 95% certainty that the fund will return between -6.3% and 21%.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].