What Goes Into a Retirement Model Portfolio?


In this article we will refer to a “retirement model portfolio” as a sample portfolio or target asset allocation that investors may use as a template off which they can base their own portfolios. Choosing the most appropriate securities and the right allocation to meet your investment goals is no small task. While retirement model portfolios may provide a potential reference point, they may overlook your long-term goals, personal situation, investment time horizon and other personal factors crucial to your investing strategy and asset allocation decision.

Everyone has different ideas about what retirement should look like and what makes a comfortable retirement. When building your retirement portfolio, you should first think about your retirement goals and objectives before determining an appropriate asset allocation.

Each investor’s situation is unique, there is no one-size-fits all retirement model portfolio. Factors such as life expectancy, income needs and family situations will vary from investor to investor. Before starting your search for an appropriately constructed portfolio, it is important to understand what you wish to do with your money. After all, portfolio construction is about making sure you have the ideal asset allocation so you have enough money to live the lifestyle you desire.

Using the Right Asset Allocation

We believe asset allocation is the single greatest determinant of your retirement portfolio returns. Asset allocation is your retirement portfolio’s mix of stocks, bonds, cash and other asset classes.  Stocks, bonds and cash are three of the most common asset classes, but they have very important differences:

  • Stocks There are a number of ways to get exposure to equities in your portfolio. You could purchase individual stocks, or invest in mutual funds and exchange-traded funds (ETFs). Stocks can also incredibly helpful for those seeking long-term portfolio growth, as their average annual returns are around 10%.[i]
  • Bonds You can purchase bonds individually or you can purchase bond funds or ETFs. Investors often invest in bonds (also referred to as fixed-income investments) to reduce short-term volatility in their portfolio. But lower short-term volatility in your portfolio can mean less portfolio growth in the longer term. It’s important to understand the risk-reward trade off when determining which assets classes are best suited to help you achieve your financial goals and objectives.
  • Cash. If you anticipate needing money in the near future, having some cash in your retirement portfolio may be beneficial. Do you plan to buy a car in the next three months? Are you going on vacation before the end of the year? Cash is liquid and can help fund your short-term needs.

Given the many benefits of proper diversification, investing heavily in just one company or sector within the stock market can greatly increase your overall risk. Intuitively, diversification makes sense, and finance theory agrees: Diversifying is an essential part of risk management and can be vital to long-term investment success. Yet most American investors aren’t nearly as diversified as they think. Some American investors tend to focus solely on US stocks. Overlooking the investment opportunities abroad can be a detriment towards your long-term performance.

A common misconception is that diversification can only be achieved by spreading your money across various asset classes. However, you can add international stocks or choose stocks from different sectors, company sizes (large-cap, mid-cap or small-cap stocks) and investing styles (value vs. growth) to spread your risk across different countries and areas of the market.

So what asset allocation makes sense for you? First, you will need to determine your primary investment objectives.

Understanding Retirement Portfolio Objectives

Different asset allocations will meet different objectives. Your optimal asset allocation depends on what you hope to accomplish with your funds in retirement. You need to be able to meet your goals and rebalance your portfolio allocation as circumstances change. Here are some common objectives when considering retirement model portfolios:

  • Grow the Portfolio. If you want to enhance your portfolio growth over the long term, you may want to have some—or a lot—of exposure to stocks. Look at your financial goals and where you stand right now and how much short-term volatility you can reasonably take. If you need additional growth to meet your income needs in the future, you may consider increasing the percentage of stocks within your portfolio. Investing in stocks can also help you outpace inflation over time as well if done prudently. This strategy is not suitable for every investor, but constructing a portfolio based on long-term portfolio growth characteristics can be one way to fund your nest egg for the longer term.
  • Maintain Your Portfolio’s Value in Real Terms. Not every retiree needs huge growth over the long-term, but not getting any growth can be costly. Over the years, we have spoken with many investors who simply want to be able to maintain their purchasing power and take withdrawals without depleting the value of their portfolio. Inflation is the silent, insidious killer of longer-term retirement success. Since 1925, inflation has averaged about 3% annually.[ii] To maintain your purchasing power, you would need to create a portfolio that keeps pace with inflation, which is why having an all-cash portfolio can actually lose value over time.
  • Spend It All. One potential goal for retirees is to deplete their retirement assets throughout their lifetime. But unexpected medical costs or home repairs can set you back significantly, and these added costs could even mean running out of money in retirement. This goal can be possible to achieve, but it also runs the risk of not having enough money in retirement due to a longer retirement than originally planned, unexpected costs in retirement or higher inflation in retirement than planned. In this strategy, you will need to be careful and prudent to plan for the unexpected.
  • Target a Specific End Value. Do you have a specific end value in mind for your portfolio? Maybe you have specific retirement objectives and you have an idea of a figure you need to hit. Some investors with this goal might aim to donate a certain amount or pass some money onto their heirs. Evaluate your starting point and then make decisions based on where you want to end up, over what time frame and don’t neglect to account for your own living expenses first. If necessary, this strategy could require you to include stocks to provide the necessary long-term portfolio growth.

Regardless of which category you fall into, there is no single retirement portfolio model that applies to every situation. We believe the best way to reach your end goal is by constructing a personalized portfolio specific to your needs.

A Top-Down Approach to Creating a Personalized Portfolio

Creating a personalized portfolio can greatly improve your chances of meeting your retirement goals. No two investors have identical situations and objectives, so why should your portfolio be structured as such?

Some investment and mutual fund managers determine a portfolio’s asset allocation based solely on categorical factors such as age and risk tolerance. These factors should be considered, but they aren’t the whole picture. Rather than looking at your individual goals, these models simply set up your portfolio based on your age and risk tolerance level. But we believe you should tailor a portfolio based on your income needs, spousal situation and many other aspects of life as well!

As an investor, having to choose from millions of unique securities can seem like a daunting task. Fisher Investments uses a top-down investment approach, analyzing factors such as current economic conditions, the political environment and investor sentiment prior to selecting an individual security. We believe these high-level factors are far more important when it comes to analyzing how to best position client portfolios for success.

Understanding your financial picture is the first step in tailoring a portfolio specific to your financial objectives. Some of the factors we consider when crafting your optimal long-term investment strategy are your:

  • Investment objectives
  • Investment time horizon (how long you need your assets to last)
  • Family health history
  • Income and cash flow needs during retirement
  • Spousal situation

As circumstances in your life change, your portfolio needs may need to change as well.  A mutual fund’s portfolio may not have the flexibility to adapt to changes within the capital markets or your financial needs. Our Investment Policy Committee evaluates the economic, political and sentimental drivers in the global markets before deciding to invest in stocks. Unlike money managers who focus on narrow investment categories, we focus on diversification among what we believe are the most appropriate investment options based on our forward-looking views of market conditions.

A Portfolio Just for You

For more information about what Fisher Investments recommends as an ideal allocation for your investing needs, please contact us to speak with a financial professional or learn more by downloading one of our educational guides.

[i] Source: Global Financial Data, Inc.; as of 01/12/2018. Based on annualized S&P 500 Total Return Index returns from 12/31/1925- 12/31/2017.

[ii] Source: FactSet, as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 to 12/31/2017.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.