Though you might be overwhelmed by many many details, do not be intimidated. Focus on the big events first and work out or leave out smaller ones later. As in any practice, an 80-20 rule also applies here: you can get 80% of work done with 20% efforts! That 80% of goals are much better than completely blind and just simply wait and see.
Regardless which way you use, one can see that you will need to reduce risk exposure as time goes (other than the long perpetual part, even that, you might have to think about it when it is approaching). This is again illustrates how important it is to have a sound portfolio that has acceptable drawdown or risk level. A severe portfolio damage or loss and scaling down the risk at the same time is the worst combination that can seriously impacts one’s overall finance. Limiting severe damages to a portfolio, being an intermediate or long term, is paramount to retirees.
A word of caution: by no means we endorse the so called buckets of money strategies. We believe the ones touted out there are not scientific enough (lack of back testing or analytics such as simulations) and lack of details (no precise step by step guidance instead of just vague instructions). Conceptually, however, we believe further classify one’s ongoing needs into short, intermediate and long term categories can help to setup portfolios better.
Cash, Short, Intermediate and Long Term Portfolios
Now that we divide investments into the above categories, one can use MyPlanIQ’s portfolio setup tool to find their risk profiles and set up corresponding portfolios.
Some useful tips here:
- Cash investment: we suggest you to utilize CDs to increase your interest payments. However, for those who have much larger amount of cash some of which will be only needed in other years (such as year 2, 3, 4 or 5), we suggest you consider using a CD/bond ladder portfolio (see below).
- Short term investment: you can further break this into the following
- If you only need the whole amount in 5 years, no need in the middle. You can use
- a short term bond fund such as Vanguard short term bond fund (VFSTX: Vanguard Short-Term Investment-Grade Inv, VCSH: Vanguard Short-Term Corp Bd Idx ETF) or
- a total return bond investment portfolio such as P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly listed on Advanced->Advanced Strategies page).
- customize portfolio with risk profile 100 for a particular plan in a brokerage such as Fidelity Extended Fund Picks Bond Trend Following.
- If you need money every year, you might want to consider using fixed maturity bond ETFs to build a bond ladder (example: a bond ladder of 5 years consists of 20% each in a bond ETF that is mature in 1, 2, 3, 4 and 5 years). Refer to Put Your Cash To Work: Defined Maturity Bond ETFs Can Help.
- We are currently working on a solution package for cash and short term investments. Watch this space.
- Intermediate term investment: many conservative portfolios fit into this category. Risk has to be strictly controlled in this category to avoid immediate loss. We favor Tactical Asset Allocation conservative or all weather portfolios.
- P No Load Conservative Mutual Funds Upgrading Quarterly on Advanced->Advanced Strategies page.
- TAA conservative portfolio for Retirement Income ETFs.
- All weather portfolios: Bridgewater All Weather Portfolio, Bridgewater All Weather Portfolio Risk Parityor permanent portfolios: Harry Browne Permanent Portfolio.
- Long term investment: Even in this category, one should further select portfolios based on personal situations. For people who are tight in budget, risk has to be the most important factor. For people who have leeway or room to withstand loss, strategic asset allocation (SAA) can be used. In general, we favor core-satellite portfolios with core being SAA and satellite being TAA. You then adjust weights of SAA core and TAA satellite to reflect your risk factor. Some of our favorite portfolios:
- Harry Browne Permanent Portfolio Core Satellite (50% permanent portfolio and 50% Vanguard ETFs TAA moderate).
- P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds (on Advanced->Advanced Strategies page).
- On FolioInvesting.com page: MyPlanIQ TAA Growth
To summarize, we believe goal based financial planning should be used to drive investment portfolio setup. Furthermore, risk should be strictly controlled when one approaches or is at retirement.
MyPlanIQ is currently working on several projects to provide better solutions in the areas mentioned above. Our goal is to provide easy to use effective solutions for various investment needs.
Portfolio Performance Review
We show the performance for various portfolios mentioned above:
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Diversified Asset Allocation Portfolios For Your Plans
