Fund Watch


Great Funds to Own in Retirement

Stacy Rapacon

New retirees with decades ahead of them still need a growth-oriented mix of stocks and bonds.



Retiring is a major milestone, but when it comes to your investing strategy, leaving behind the 9-to-5 grind shouldn't alter your mindset too much. "When you retire, virtually nothing has changed," says Tim Courtney, chief investment officer at Exencial Wealth Advisors in Oklahoma City. "You still have the same life expectancy, though you're a little bit older, and you still have to make that money stretch over the rest of your life."

Tool: Mutual Fund Finder

With perhaps 20 or 30 years ahead of you, keep your focus on growth. There are model portfolios to suit a variety of needs. Courtney, for one, recommends putting 15% to 30% of your retirement portfolio in high-quality bonds and 5% to 15% in riskier bonds. The remainder should go into “growth investments”—primarily U.S. stocks. Of the stock portion of your portfolio, at least 30% should go toward international stocks, including emerging-markets stocks, and 5% to 15% should go toward real estate investment trusts.

A smart way to assemble any investment portfolio, including a retirement portfolio, is to put your money in low-cost, no-load mutual funds. Here are a few funds that can help you meet your retirement goals (all returns are through June 25).

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Buy American

For cheap exposure to U.S. stocks, look no further than Vanguard Total Stock Market Index (VTSMX). The fund, which charges just 0.17% in annual expenses, tracks the performance of more than 3,600 domestic stocks of companies of all sizes. Over the past year, it has returned 26%, pacing the performance of Standard & Poor's 500-stock index, which includes mostly large companies, as well as the broader Russell 3000 index. The required minimum initial investment is $3,000. If you favor exchange-traded funds, Vanguard Total Stock Market ETF (VTI) is comparable to the mutual fund.

Look to another Vanguard mutual fund for an affordable way to invest in U.S. real estate. Vanguard REIT Index (VGSIX) is devoted to domestic REITs, companies that own income-generating properties ranging from apartment buildings to hotels to health care facilities. The fund has outperformed its real estate category average over the past 1-, 3-, 5- and 10-year periods, including a 9.6% annualized return over the past decade. As a bonus, Vanguard reports a current yield of 2.4%. Annual expenses are a mere 0.24%, and it costs $3,000 to get started in the fund.

Venture Outside the U.S.

You should diversify your portfolio by storing some of your investment dollars abroad. Cambiar International Equity (CAMIX), a newcomer to the Kiplinger 25, a list of our favorite no-load mutual funds, is a good choice for stocks in developed international markets. The fund’s managers seek out bargains among big, well-known companies that they believe are experiencing temporary setbacks. Recent top holdings include Japan’s Nippon Telegraph & Telephone and Germany’s Daimler. For exposure to developing countries, consider another Kip 25 member, Harding Loevner Emerging Markets (HLEMX). Like many actively managed international funds, both of these funds have expenses can seem high compared with those of index funds. Cambiar charges 1.23%; Harding Loevner, 1.47%.

For a twist on overseas investing, Courtney likes Schwab Fundamental International Small Company Index (SFILX), which mimics the performance of the shares of more than 1,200 small foreign companies that make up the Russell Fundamental Developed ex-U.S. Small Company index. Traditional indexes weight stocks by market capitalization (share price times the number of shares outstanding), but a fundamental index measures companies based on other performance and valuation criteria. Over the past year, the Schwab fund has gained 26.7%. You can buy into the fund with just $100 initially, and you’ll pay a low 0.47% in annual expenses.

Bank on Bonds

No matter how carefully you plan your retirement, one thing you can’t anticipate is the state of the market after your big day arrives. "What happens if you need income from your portfolio at the same time that the market is in a downturn?" Courtney asks. To guard against being forced to sell stocks at an inopportune moment to raise cash, he says that ideally you should keep four to five years’ worth of living expenses in short-term, high-quality bonds.

For this purpose, Courtney recommends Vanguard Short-Term Investment-Grade (VFSTX), another Kip 25 member. Its portfolio of nearly 2,000 holdings includes a mix of U.S. Treasuries, foreign government bonds, corporate bonds, and bonds backed by assets such as loans and leases. The short-term nature of the fund also means it shouldn’t take too much of a hit once interest rates start to rise (bond prices and interest rates generally move in opposite directions).

Don't expect to get rich off this portion of your portfolio. "You're not going to get a whole lot of return from [this fund], but it's going to be relatively stable and keep pace with inflation," Courtney says. Over the past year, Vanguard Short-Term Investment-Grade has returned 3.4%. The fund yields 1.5%, requires $3,000 initially and costs just 0.20% in annual expenses.

Seek Additional Income Abroad

As a new retiree, you may be looking to generate more income from your investments to make up for your lost paycheck. To do so, Courtney recommends wading into riskier bonds, including some foreign bonds.

A great mutual fund for foreign bonds is Kip 25 member Fidelity New Markets Income (FNMIX). It invests primarily in debts issued by governments and corporations in developing nations, including Mexico, Venezuela and Indonesia. The current yield is an enticing 4.9%, and the 10-year annualized return is an impressive 10.4%. Annual expenses are 0.84%. (See Buy Emerging-Markets Bonds for other fund recommendations.)



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