If you’re retired or on the brink of retirement and you want a relatively simple low-cost investment that won’t lead you astray, your search should start with Vanguard mutual funds.
Let me be clear: This article isn’t a sales pitch. I don’t work for Vanguard and I have no affiliation with the company except as a shareholder in their funds.
Vanguard has more than $7 trillion under its management and is the only mutual fund company with a financial structure built to benefit the shareholders in its mutual funds.
The company’s funds are known for low expenses and the lower tax exposure that comes from low turnover. It should go without saying that Vanguard funds are no-load funds. No sales commission, no sales pressure.
From Vanguard’s offering of excellent funds, here are nine that I like for retirees.
Vanguard Short-Term Investment Grade Fund
This is the first fund my wife and I invest in every year. In January, we make our annual withdrawal from long-term investments to cover our expenses for the year ahead. This fund is also where we keep our emergency cash.
Because this fund holds no stocks, our finances are remarkably emotion-free. No matter what’s happening in the stock market at any given moment, we know that won’t affect us until the following calendar year. If you’ve never tried managing your money like this, I recommend it.
You won’t get rich in this fund, but you’ll probably earn nearly 100 times as much as you’d get in a typical bank savings account paying (this is really disgusting!) 0.01% interest.
Over the past 15 years, this fund appreciated at 3.27%.
Balanced funds: boringly beautiful
Balanced funds hold both stocks and bonds. Over the years their shareholders are statistically likely to have above-average success as investors.
Why is that? Not because the funds themselves have any magic. It’s because the combination of growth and stability make you more likely to be content to leave your money where it is instead of trying to figure out when to buy and when to sell.
None of the following eight balanced funds is designed to normally hold much more than about 60% in equities. That means they aren’t likely to suffer the sort of major losses of all-equity funds.
Any one of these could make a good one-fund portfolio for a retiree. But don’t choose at random; the differences matter.
Vanguard Target Retirement 2015
If you’re already retired, this fund of funds has your back. With an equity stake of only about 35% and the diversification of (indirectly) owning more than 10,000 stocks and 24,000 bonds, you just won’t go very far wrong. You’ll get some growth plus a good measure of stability.
If you like the target date concept but want a bit more equity exposure, it’s easy to pick a variation focused on a later year such as 2020 or 2025.
Vanguard LifeStrategy Funds
These funds of funds come in varying combinations of equity exposure, from 20% to 80%, though I’m excluding the most aggressive one from this discussion. All the bonds in these funds, by the way, are investment grade. No junk.
LifeStrategy Income Fund
typically holds only about 20% of its portfolio in equity funds, with the rest in bonds, perhaps a good fit for investors with ample resources (more than they think they’ll ever need, in other words) and those who are very skittish about the stock market.
LifeStrategy Conservative Growth
doubles that equity stake to about 40%, perhaps the right choice for conservative retirees who want some growth but are not willing to go very far out on a limb to get it.
LifeStrategy Moderate Growth
is very similar, but with a 60/40 split of equities and bonds. This provides more growth, although still without much excitement.
Two funds for retirees who don’t know a lot about investing
For conservative retirees that I don’t know well, Wellesley has become what I regard as my best piece of advice.
Wellesley has been taking good care of investors since 1970. Its portfolio is normally 40% in equities, 60% in bonds. This is a low-cost actively managed fund, holding about 70 large-cap stocks (mostly value stocks) and about 1,300 bonds.
For those who are less conservative, Wellington is my go-to suggestion, especially for people who value a very long track record.
Wellington has been in business since 1929 and was the industry’s very first balanced fund.
Wellington’s typical 60/40 split of equities and bonds mirrors the way the trustees of many large pension funds invest. They know they need reliable long-term growth and that their portfolios must, in all circumstances, be able to pay their pensioners.
Wellington is actively managed, with about 60 large-cap stocks and about 1,100 bonds.
Note: My wife and I prefer an overall 50/50 allocation of equities and bonds. If that appeals to you, you could achieve that by splitting your money evenly between Wellesley and Wellington.
Two other Vanguard balanced funds are worth considering.
Vanguard Balanced Index Fund
is index driven, holding about 60% of its portfolio in 3,300 U.S. mostly growth-oriented stocks and the rest in about 10,700 bonds.
Vanguard Tax-Managed Balanced Fund
is managed to minimize capital gains distributions and other taxable income, with a typical equity/bond split closer to 50/50. If you like that allocation along with lower tax bills, this fund could be for you.
Returns and risks
As you can see in the table below, levels of risk and return are indeed linked, but not always exactly what you would expect.
Funds are listed in order of their trailing 15-year compound annual growth rate (as of early October). For each, you’ll also see its performance during 2008, the worst calendar year for investors in a long time.
Table 1: Vanguard funds compared
Target Retirement 2015*
Short-Term Investment Grade
*Statistics for this fund reflect a period when the fund had a more aggressive allocation than it does now.
For more on these funds (plus four all-equity funds), check out a video presentation I made last year: “My 12 Favorite Vanguard Funds for Retirees.”