Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Constructing a balanced portfolio of index funds yielding 3 1/2%-4%
Old 11-26-2008, 07:55 PM   #1
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
Constructing a balanced portfolio of index funds yielding 3 1/2%-4%

This is what I would like to do. Is this possible and can anyone steer me to a resource that would help me construct a 50-50 portfolio that would throw off 4% +- in cash flow each year? One that was not over weighted towards financials also. All I need is 4%. Could I then ignore the volatility in principal?
__________________

__________________
cashflo2u2 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-26-2008, 08:04 PM   #2
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Look at value and dividen indexes.
Look at annuities.

Most equity funds can yield about 2.4 percent in a bull and approach 3 percent in times like 2008.

There are some equity funds which yield higher (check out Alpine dynamic dividend). Vanguard has 2 funds to consider- dividend index and high yield index I think are ther names. Neither has a long history.

Most bond funds yield around 4.4 percent to five percent.

PSST- Wellesley also comes to mind.
RPSIX also comes to mind.

I made up some spread sheets for this-

Income =x%*bonds+ y%*dividend stocks+ z%*high yield (fund or annuity)

The z could also be REITs
__________________

__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 11-26-2008, 08:05 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
That's easy peasy lemon squeezy these days. With yields where they are I think a 50/50 split of the S&P 500 and Total Bond Index gets you pretty close to 4%, if not a bit more.
__________________
Gone4Good is offline   Reply With Quote
Old 11-26-2008, 08:07 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Posts: 1,487
vanguard wellington.
__________________
d is offline   Reply With Quote
Old 11-26-2008, 08:10 PM   #5
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,078
You can get in the ballpark with a mix of 50% Vanguard Wellesley (33/67) and 50% Wellington (67/33). The expense ratio for both is under 0.3% and the current yield is 5.84% and 4.45% respectively - although in "normal" times the combined average yield should be closer to 3.5% to 4.0%.
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 11-26-2008, 08:23 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Posts: 1,487
Quote:
Originally Posted by cashflo2u2 View Post
Could I then ignore the volatility in principal?
that would likely be unwise; as would assuming dividend yields would hold.
__________________
d is offline   Reply With Quote
Old 11-26-2008, 08:50 PM   #7
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,037
"All-in-one" approach:

VG target retirement 2010, yields 4.09%, 53% stocks / 47% bonds at the moment
VG lifestrategy conservative growth, yields 4.18%, 51% stocks / 49% bonds
Of course, my favorite, 50% Wellington / 50% Wellesley

Slice and Dice Approach:

Lots of good stocks funds with some decent yields right now:
VG Equity income yields 4.17%, 100% large cap stocks
VG Small cap value index yields 3.42%, 100% small cap value
VG total international stock index yields 4.76% (!!!), 100% foreign equities
VG REIT index yields 7.8%, 100% REITs
You can supplement those stock funds with the following bond funds:
VG intermediate term investment grade yields 7.7%, 100% corporate bonds
VG intermediate term tax exempt yields 4.1% (tax free), 100% munis
VG GNMA yields 4.76%, 100% government agencies
or go VG total bond market index yields 4.9%
__________________
FIREd is offline   Reply With Quote
Old 11-27-2008, 05:17 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
So we do not mistake your goal...

What are you trying to accomplish (e.g., ER income, partial ER income, etc.)?

What phase are you in plus approximate age?

  • Accumulation phase.
  • Transition phase - Nearing Distribution.
  • Distribution phase.
__________________
chinaco is offline   Reply With Quote
Old 11-27-2008, 07:03 AM   #9
Thinks s/he gets paid by the post
OAG's Avatar
 
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,598
Capital One FDIC 10 Year CD will "throw" off 5.54% (5.7% APY),having interest paid to you monthly. 10 Years of Income no potential loss of principal. And you can fully protect up to $500K at that bank using the "old rules" ($1,000K at the current ones - that, unless extended, expire at the end of 2009). You can "set and forget" except looking at the monthly checks or deposits. I see from your first post you are, more or less, in the stage of not necessarily wanting to take on "risk" - which is why I suggest this method.
__________________
Vietnam Veteran, CW4 USA, Retired 1979
OAG is offline   Reply With Quote
Old 11-27-2008, 08:43 AM   #10
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,435
I like Vanguard's Equity Income fund (VEIPX) for the stock side of things; it's yielding 4.2%. You could do something like:

10% Cash (VMPXX)
20% Vanguard inflation-protected securities (VIPSX)
30% Vanguard total bond market index (VBMFX)
40% Vanguard equity income (VEIPX)
__________________
soupcxan is offline   Reply With Quote
Old 11-27-2008, 09:11 AM   #11
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
Quote:
Originally Posted by chinaco View Post
So we do not mistake your goal...

What are you trying to accomplish (e.g., ER income, partial ER income, etc.)?

What phase are you in plus approximate age?

  • Accumulation phase.
  • Transition phase - Nearing Distribution.
  • Distribution phase.
In retirement distribution phase for two of us. Probably 20+ years to ultimate malfunction.
__________________
cashflo2u2 is offline   Reply With Quote
Old 11-27-2008, 09:13 AM   #12
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
Quote:
Originally Posted by d View Post
that would likely be unwise; as would assuming dividend yields would hold.
I don't understand what you are getting at in making this statement. Could you expand on this?
__________________
cashflo2u2 is offline   Reply With Quote
Old 11-27-2008, 09:14 AM   #13
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
I'm moving my mom's Vanguard IRA (mostly in money market since my dad passed three years ago) into a combination of VIPSX, Wellington and Wellesley, in addition to keeping some of the money market fund for a little more price stability in the portfolio. Right now this looks like it would yield north of 4.5% in the quantities allocated.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 11-27-2008, 10:46 AM   #14
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
I'm seriously considering the Wellington/Wellesley combo. But how important is it to have small cap and other diversification in the mix? Also, I assume I abdicate portfolio rebalancing to the mutual fund manager in doing this move.
__________________
cashflo2u2 is offline   Reply With Quote
Old 11-27-2008, 11:06 AM   #15
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,037
Quote:
Originally Posted by cashflo2u2 View Post
I'm seriously considering the Wellington/Wellesley combo. But how important is it to have small cap and other diversification in the mix? Also, I assume I abdicate portfolio rebalancing to the mutual fund manager in doing this move.
With Wellington + Wellesley you basically invest in only 2 asset classes: Large value stocks and intermediate corporate bonds. So I supplement the Wellington / Wellesley mix with a few other funds: NASEX for small caps, VGTSX for international (Wellington has only 13% invested in foreign equities and Wellesley only 4%), VGSIX for REIT exposure. On the bond side I added some AAA-rated bonds to the mix. If you go 100% Wellington + Wellesley, you indeed would abdicate portfolio rebalancing to Vanguard. If you diversify beyond that, you'll have to rebalance yourself.
__________________
FIREd is offline   Reply With Quote
Old 11-27-2008, 11:40 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,382
Quote:
Originally Posted by cashflo2u2 View Post
This is what I would like to do. Is this possible and can anyone steer me to a resource that would help me construct a 50-50 portfolio that would throw off 4% +- in cash flow each year? One that was not over weighted towards financials also. All I need is 4%. Could I then ignore the volatility in principal?
I think if the funds are well chosen, you could more or less ignore the volatility in principle. One of the goals of retirement investment is to be able to ignore variations in principle.

Say you didn't ignore it; what would you then do? Buy high, sell low?

A bigger risk IMO in the 50:50 portfolio that you mention is losing out to inflation. If it is barely throwing off 4% now, you would need the stock portion to increase payouts at twice the rate of inflation to countebalance the bond portion which will not be increasig at all. Using TIPS could mitigate this, but to do it strictly from income would lower your yield a bit. (In fact it would very likely raise your real yield, but by using nominal bonds you are able to hide from yourself when you are falling behind to inflation.)

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 11-27-2008, 04:59 PM   #17
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
So, what you are saying is that I need a nominal rate of return that is equal to the expected inflation rate plus 4%? Then we are right back to buying all equities, i.e., "stocks for the long run"?
__________________
cashflo2u2 is offline   Reply With Quote
Old 11-27-2008, 05:26 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Quote:
Originally Posted by cashflo2u2 View Post
So, what you are saying is that I need a nominal rate of return that is equal to the expected inflation rate plus 4%? Then we are right back to buying all equities, i.e., "stocks for the long run"?
This gets back to Chinaco's question: What are you ultimately trying to accomplish? It's not clear if you want/need 3.5% to 4% REAL return, or return >before< inflation (they are very different things). How long do you need the portfolio to generate this return? How much volatility is acceptable?
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 11-27-2008, 06:20 PM   #19
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
Quote:
Originally Posted by haha View Post

A bigger risk IMO in the 50:50 portfolio that you mention is losing out to inflation. If it is barely throwing off 4% now, you would need the stock portion to increase payouts at twice the rate of inflation to countebalance the bond portion which will not be increasig at all.

Ha
Ha, SamClem. I thought with a 4%+- dividend income return on the 50%-55% plus the interest income I could possible count on the 4% cash flow for living and the capital growth in the equity portion would take care of protecting the purchasing power of the principal. I am not concerned with passing it on- just consumption for the reminder of our time before the ultimate malfunction. I could live with volatility up to say 20%, but several people have made the point- if you are getting the 4% forget the volitility. But I find as many other people say that is a flawed concept and total return is what you need to look at.
__________________
cashflo2u2 is offline   Reply With Quote
Old 11-28-2008, 07:29 AM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,434
Quote:
Originally Posted by cashflo2u2 View Post
Ha, SamClem. I thought with a 4%+- dividend income return on the 50%-55% plus the interest income I could possible count on the 4% cash flow for living and the capital growth in the equity portion would take care of protecting the purchasing power of the principal. I am not concerned with passing it on- just consumption for the reminder of our time before the ultimate malfunction. I could live with volatility up to say 20%, but several people have made the point- if you are getting the 4% forget the volitility. But I find as many other people say that is a flawed concept and total return is what you need to look at.
I had a 50/50 AA going into retirement in April 2007. Now after my 25% haircut, how is that going to help me keep up with inflation? I guess the point I'm making is it's not as easy to accept volatility as one might think. I know it hasen't been for me. If I had it to do over again, I would have 50% in cd's and 50% in Wellesley. The net result would give me roughly a 20/80 AA. I would be a much happier person right now. But too far down to convert now. Got to hope and pray I get some of it back one day.
__________________

__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
What do you think of these balanced funds? rec7 FIRE and Money 34 05-09-2008 12:17 PM
Work Less Live More: Is his balanced portfolio still good? Shabber2 FIRE and Money 28 02-03-2008 10:27 AM
Balanced Funds Only? Maneiac FIRE and Money 15 05-22-2006 09:14 PM
Balanced Index Investing? charlie FIRE and Money 17 04-28-2004 01:39 PM
Index Funds or Balanced Funds ? renferme FIRE and Money 5 04-20-2004 05:21 PM

 

 
All times are GMT -6. The time now is 05:05 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.