Asset Allocation Plans (Or ... Putting Enough Away For When You Decide To Hang It Up)

The end of another year is fast upon us, so it's time for another look at investing for retirement.

TAG members have two automatic pension plans -- the Defined Benefit Plan that gives you a monthly payout at retirement, and an Individual Account Plan. Think of the IAP as a big basket of money earning interest and stock income that the Motion Picture Pension Plan will pay to you when you are ready to ride off into the setting sun and leave the 9-to-5 deal behind.

And if you know little about where to stash part of each paycheck, not a problem. You can use Vanguard Retirement Date Funds, and let the giganto mutual fund company do the heavy investment lifting (and deep choices) for you, or you can do some reconnoitering and decide on your own where you want to put your investment dollars to work.

Here's a place to start. ...

150 Portfolios Better Than Yours

... No one knows which [investment] portfolio is going to outperform in the future. You can change all the factors you want- more or less diversification, additional risks/factors, lower costs vs additional risk or diversification, more of this and less of that. Does it matter? Absolutely. Take a look at Madsinger’s Monthly Report some time. But it doesn’t matter that much. No diversified portfolio in that report has done better than 1-2% per year more than a similarly risky portfolio over the last 15 years. Now 1-2% does matter, especially over long periods of time, but keep in mind the edge that a very complex portfolio might provide over a very simple one can easily be eaten up by advisory fees, behavioral errors, and poor tax management.

I suggest you pick a portfolio you like and think you can stick with for a few decades, and then do so. Eventually, any given portfolio will have its day in the sun. Just don’t continually change your portfolio in response to changes in the investment winds. This is the equivalent of driving while looking through the rear view mirror, or, as Dr. Bernstein likes to phrase it, skating to where the puck was. ...

Portfolio 1: The S&P 500 Portfolio

100% Vanguard S&P 500 Index Fund

Don’t laugh. I know a very successful two-physician couple who invest in nothing but this, are 7 years out of residency, have a net worth in the $1-2 Million range. Their investment plan is working fine. Every investment dollar, whether in a retirement account or a taxable account, goes into this single fund. It is simple, very low cost, diversified among 500 different companies, and has a long track record of exceptional returns.

Portfolio 2: Total Stock Market Portfolio

100% Vanguard Total Stock Market Index Fund

Perhaps one step up on the S&P 500 portfolio, for about the same cost you get another 5000+ stocks in the portfolio.

Portfolio 3: Total World Stock Market Portfolio

100% Vanguard Total World Index Fund

This 100% stock portfolio has the advantage of not only holding all the US Stocks like the Total Stock Market Portfolio, but also holding all of the stocks in pretty much all the other countries in the world that matter. It is a little more expensive (and in fact it is actually cheaper to build this fund yourself from its components), but it still weighs in at less than 20 basis points if you buy the ETF.

Portfolios 4 and 5: Balanced Index Fund

100% Vanguard Balanced Index Fund

Prefer to diversify out of stocks? Actually want some bonds in the portfolio? How about this one? For less than 10 basis points you get all the stocks in the US and all the bonds in the US in a 60/40 balance. Still just one fund. If you’re in a high tax bracket, you may prefer the Tax-Managed Balanced Fund, a 48/52 blend of US Stocks and Municipal bonds, all for just 12 basis points.

Portfolios 6-9: Life Strategy Moderate Growth Portfolio

100% Vanguard Life Strategy Moderate Growth Fund

For just 16 basis points, you get all the US (32%) and international (18%) stocks and all the US (42%) and international (8%) bonds wrapped up in a handy, fixed asset allocation. Want to be a little more (or a little less) aggressive? Then check out the “aggressive growth” (80/20), “conservative growth” (41/59) or “income” (30/70)version with a slightly different allocation of the same asset classes. ...

And so on and so forth. Here's the rub: You can use any number of the portfolios shown above (and many more), stick with them, and you will have a sizable nest egg by the time you become a seasoned citizen.

There are really only a few simple rules:

1) Keep costs low.

2) Keep your portfolio diversified.

3) Stick with the program.

And understand that there will ALWAYS be a portfolio better than yours, but that it doesn't matter. What matters is saving and investing for the day when you'll need the money to live comfortably without a regular paycheck.