There is no “one-size-fits-all” approach to retirement investing. Most money managers will just throw you into an asset allocation involving stocks and bonds, with an emphasis on bonds and fixed income, and leave it at that. The problem is that all investing, including retirement investing, is holistic.
One thing money managers will never tell you about retirement investing, but which is a cornerstone of my investment advisory newsletter, The Liberty Portfolio, is that inflation does not really run at 3%. The true rate of inflation runs between 8% to 10% annually. That almost certainly means you are underinvested.
Thus, proper retirement investing means finding mutual funds that may bear little resemblance to what you expect. These three mutual funds for retirement investing are merely suggestions to consider as part of your overall approach to investing.
Smart Mutual Fund #1
The first choice of mutual funds for retirement is a selection I can’t get away from. No matter how many different ways I look at mutual funds for retirement, I always come back to the Vanguard Health Care Fund (MUTF:VGHCX).
The healthcare sector has always been an attractive long-term investment. We have an aging population, growing developing markets, growing emerging markets and constant innovation in the sector. In addition, healthcare is wrapped around the DNA of the human experience. To bastardize a David Mamet line, “Everyone needs healthcare, that’s why they call it healthcare.”
Consequently, there will always be demand for healthcare, particularly healthcare in the form of stocks with a history of innovation.
The fund has 75 stocks, most of which are famous names, and about half of which are pharmaceutical stocks. since the fund launched 34 years ago it has an average annual return of more than 16%, which is astonishingly good.
Smart Mutual Fund #2
There are some strong funds that are targeted more towards retirement. The TIAA-CREF Lifecycle Retirement Income Fund (MUTF:TLIRX) has a fairly well-diversified mix of both stocks and bonds. Nearly 37% of the fund is in stocks — of which, two thirds are domestic companies — and 55% of the fund is in bonds. The rest is in other investments.
The US stocks are mostly geared towards large caps, but there is some small- and mid-cap exposure too. This is necessary because small- and mid-cap stocks are generally less correlated to the overall market.
The bond side of the portfolio is nicely diversified across both maturity and geography, as well as different types of bonds. 21% are government bonds, 16% are corporate bonds and about 15% are different classifications of securitized bonds. Nearly all of the bonds have a coupon range between 0% and 4%, and 84% of them are from companies based here in the United States.
Morningstar gives five stars to this fund.
Smart Mutual Fund #3
I know retirement investors may not want to hear this but, when it comes to mutual funds for retirement, you really do need some international exposure. I know that international investing can seem a little scary, because consumers and corporations are different from country to country.
Nevertheless, the perception that international companies are somehow more unstable is mostly just that — perception. You really do need emerging market exposure because emerging markets are substantially less correlated to the US market.
Ivy Emerging Markets Equity Fund Class C (MUTF:IPOCX) offers an emerging market strategy which I prefer, in that it focuses a lot more on Asia and Latin America. Asian developed markets represent 25% of the fund’s asset base. Asian emerging markets take up 41%, while Latin America represents 18%.
I would like to see a little more sector diversification. Real estate only accounts for 4% of the portfolio, the same allocation given to consumer defensive and healthcare. Utilities only account for 1%.
Still, the fund is relatively cheap when it comes to valuations we are seeing with US stocks. In fact, I’m rather surprised to find the average price-to-earnings ratio come in at just under 11, with long-term earnings growth projected to be 19% on average. In essence, then, we have a value fund that is truly invested in undervalued securities.
That’s a tough thing to find in this market.
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 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.