Re: Balanced portfolio with index funds

Anoop Ghanwani wrote:
> Are there rules of thumb for building a balanced retirement
> portfolio with index funds such as the S&P 500 and the total
> bond market index fund?  For example, would it make sense
> to allocate funds as follows:
>
> Age     S&P 500   Total Bond Market
> <30     100%      0%
> 30-40   80%       20%
> 40-50   60%       40%
> 50-60   40%       60%

It really depends on what you're investing for. If the plan is to get 
ready for withdrawing assets beginning at retirement age, and depleting 
them over your retirement years, then most people will want to gradually 
reduce the volatility of their investments as they age (ie shift to 
bonds, esp. shorter-term bonds). Doing so makes it more likely that your 
money will last, even if the stock market tanks early in your 
retirement. I think that's why generic asset allocation models show the 
gradual shift, they assume you retire and start taking money out, and 
increase the money you take year by year.

In practice there's a lot of variation and it seems people who plan 
their savings well in advance don't follow that kind of withdrawal 
program. So your age brackets for different allocations might be a lot 
different. By age 70 you could have say 30% invested in bonds and cash, 
and with social security factored in, still have more than enough income 
to live off of, and enough accessible dollars for any conceivable need, 
even factoring in stock volatility. Or maybe you have a fixed annuity 
providing regular cash so it adjusts the investment allocation. Point 
being it really depends on what that number at the end of the pipe looks 
like, and what sort of spending you have in mind for the assets. The 
more %-wise you'll spend, the more you'll want to shift to 
short/intermediate bonds and cash. This isn't just for retirement, it 
applies really to any savings goal.

If you think of your retirement funds as a personal pension fund: a lot 
of pension funds seem to hover around a 60/40 equities/bonds allocation. 
Typically they're funding a lot of longer-term needs, as well as current 
liabilities, so it's a bit different, but not all that different from 
what a lot of people end up doing with their retirement savings (spend 
some, pass the rest on).

> Is this too simplistic a plan?  I'm basically looking 
> for a long-term investment strategy that is known to work
> reasonably well in all market conditions so that one 
> doesn't have to keep watching what the fund manager is
> up to.

You could do a lot worse than some kind of rote combination of asset 
classes, using strictly index funds. Gibson's "Asset Allocation" gives 
some direction on how to do this. You might read it and end up doing an 
elaborate analysis to pick the mix, but it might also give you 
confidence in something relatively simple.

-Tad