© Reuters. Retirees: Replace your investment portfolio with just one Vanguard ETF
Retirees with a large investment portfolio are primarily concerned with two things: making sure their portfolio gets them through retirement and mitigating the risk of a major market correction that could impact their nest egg.
The first is managed by investing in a large portfolio of stocks that provide a sufficient stream of income, either through dividends or through the sale of shares. The goal here is to achieve a “safe perpetual withdrawal rate” (typically 4%), where the portfolio will not be depleted prematurely.
The latter is managed by investing in bonds. A bond allocation does two things in a portfolio: it reduces volatility and reduces drawdown. The value of your portfolio will fluctuate less and the peak-to-trough losses it suffers during a crash will be lower than those of a 100% equity portfolio.
Asset allocation for retirees The objective for retirees is therefore sound risk management. We want to eliminate as many sources of risk as possible and control the inevitable. Risks such as high fees and under-diversification can be eliminated entirely.
The former can be reduced by buying exchange-traded funds (ETFs) with low management expense ratios (MERs). The MER is the percentage that is deducted from the net asset value (NAV) of the ETF over time, calculated on an annual basis. For example, an MER of 0.50% means that for every $10,000 invested, the ETF charges a fee of $50 per year. We want to keep this level low, preferably below 0.30%.
Underdiversification can be controlled by buying stocks from all countries, sectors and market capitalizations. The goal here is to not expose ourselves to the risk that one of these categories in particular will do poorly for years. In this case, we benchmark our risk and accept the average return.
Unavoidable risks generally refer to market risk. It is the risk that all investors who own stocks or bonds bear. By investing, you take risks for potential returns. Although inevitable, we can control what we take. This usually comes in the form of a bond allocation, as discussed earlier.
The best ETF for the role So, our ideal investment is one that is diversified across countries, market caps and sectors and holds an appropriate amount of high-quality bonds. It turns out you can actually achieve all of this by just buying a single ticker.
Our ETF of choice is Vanguard Conservative ETF Portfolio (:VCNS). VCNS has a 40/60 stock/bond split, which is perfect for retirees with a low tolerance for risk. The ETF holds 60% of more than 13,000 large-, mid-, and small-cap stocks across multiple sectors, and 40% in federal, provincial, municipal, and investment-grade corporate bonds.
VCNS is spread approximately 40% in the United States, 20% in developed markets and 7.5% in emerging markets, with a Canadian bias of 30% to mitigate currency risk and reduce volatility. Holding VCNS will cost you a management expense ratio of 0.24% per year, or $24 per $10,000 invested.
The senseless retirement should be your golden age. Keeping your retreats simple, diverse, and inexpensive is a great way to do this. With asset allocation ETFs like VCNS, managing your investments is as simple as buying and selling a ticker and reinvesting the dividends. No research or rebalancing is necessary. This allows you to focus on the important things in life and not on the risk of your investments.
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Contributor jerk Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned.
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