Constructing a balanced portfolio of index funds yielding 3 1/2%-4%

[cashflo2u2]

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?

 

[jIMOh]

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

 

[Gone4Good]

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.

 

[d]

vanguard wellington.

 

[REWahoo]

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%.

 

[d]

Could I then ignore the volatility in principal?

that would likely be unwise; as would assuming dividend yields would hold.

 

[FIREd]

"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%

 

[chinaco]

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.

 

[OAG]

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.

 

[soupcxan]

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)

 

[cashflo2u2]

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]

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?

 

[ziggy29]

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.

 

[cashflo2u2]

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.

 

[FIREd]

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.

 

[haha]

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

 

[cashflo2u2]

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"?

 

[samclem]

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?

 

[cashflo2u2]

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.

 

[Dawg52]

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.

 

[chinaco]

Some helpful summaries/illustrations of popular withdrawal strategies complements of Bob.

Withdrawal Strategies Links Page

IMO - you need to construct a portfolio that will beat inflation and hopefully yield the 4%. Mutliple paths to do so. I prefer VG Index funds because of low costs. Some prefer actively managed funds... Some also prefer to split out the stocks and bonds so you do not Reverse DCA during the draw-down.

Reverse Dollar Cost Averaging

http://bobsfiles.home.att.net/CashFlowInRetirement.html

 

[REWahoo]

Got to hope and pray I get some of it back one day.

Dawg, you need to look on the positive side. The DOW is up 18% from it's 7,392 low so you've already achieved your goal - you got some of it back, right?

 

[Dawg52]

Dawg, you need to look on the positive side. The DOW is up 18% from it's 7,392 low so you've already achieved your goal - you got some of it back, right?

I should have said, a lot of it back. Sorry Ha. --->

 

[canadianteddy]

Chinaco - thanks for the links - they seem to crystalize what I'm beginning to learn from this website and other sources

Much appreciated

 

[cashflo2u2]

dawg, sorry for the timing on your retirement. I was wondering about folks who began retirement in early 2007. Anyway, again, the theory of some is that if your portfolio is generating enough divvies and interest for what you need, you can ignore that decrease in the value your portfolio and go happily on your journey into the sunset.