What Index Funds If I am 60

[tjrking]

Dear Fellow Believers

I am 60 and totally buy-in to the MMM plan.  If I was 20-50, I would understand investing purely in Vanguard Total Stock Market Index mutual fund, Admoral Shares,  or ETF alone.  But due to my age, was thinking of going half into their dividend ETFs and at 65 going all to the dividend ETFs for more safety and income.  Maybe Vanguard REITs in the mix as well.

Would surely appreciate your thoughts.

[Frankies Girl]

Jim Collins is I believe in his mid/late 50s, so I'd use his portfolio as a good guideline - 75% stocks/25% bonds.

VTSAX for the stocks, and VBTLX for the bonds. He also holds somewhere in the neighborhood of 5% in cash, but I'm not sure how that skews the 75/25 split.

http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
(addendum #1 shows where he sold off his REITs and went into VTSAX instead)

And if you haven't already read his stock series, it's highly recommended around here:
http://jlcollinsnh.com/stock-series/

[tjrking]

thanks for the wise advice.  I did study those two links a few months ago and believe in his approach with some minor modifications.  You seem to favor the bod fund over the dividend funds VIG and VYM.  Have you considered or studied them as an option?

[DollarsAndDissonance]

I think it depends on your goals.  If you're willing to take some risk for a higher average return, then a stock-heavy mix like Jim Collins' might make sense -- but you have to be willing to take on the risk of a stock market crash.  Can you weather a 50% drop in stock prices for the next 5-10 years?  (This may be an unlikely scenario, but there's always a chance.)  I'd personally be uncomfortable with that much money in stocks at 60, especially if I were no longer working.  On the other hand, if you're just looking to safely preserve the money you have against wild market fluctuations, inflation, deflation, etc., then you might consider a more diversified portfolio with more bonds, currencies, commodities, etc.

[Eric]

Dear Fellow Believers

I am 60 and totally buy-in to the MMM plan.  If I was 20-50, I would understand investing purely in Vanguard Total Stock Market Index mutual fund, Admoral Shares,  or ETF alone.  But due to my age, was thinking of going half into their dividend ETFs and at 65 going all to the dividend ETFs for more safety and income.  Maybe Vanguard REITs in the mix as well.

Would surely appreciate your thoughts.

There's nothing inherently safer about dividend paying stocks.  If you're using a fund, that fund will by definition be less diversified than the Total Market fund, so you're actually adding more risk, not less.  I'm not saying it's a bad strategy, just that it's not safer.

When a stock pays a dividend, it's share price drops by that amount.  So if you have stock worth $100, and it pays a $3 dividend, on the dividend pay out date, you'll have a stock worth $97 and $3 in your pocket.  If you have stock worth $100, and you sell $3 worth, you now own $97 worth of stock with $3 in your pocket.  There's functionally no difference between receiving a dividend and selling a portion of your stock holding.

http://www.forbes.com/sites/billharris/2012/09/26/your-retirement-dividends-or-capital-gains/

[skyrefuge]

But due to my age, was thinking of going half into their dividend ETFs and at 65 going all to the dividend ETFs for more safety and income.

Where did you get the idea that dividend-focused stock funds offer more "safety" than a simple total stock market fund? That is incorrect.  Vanguard lists VIG, VYM (the dividend funds) and VTI (total stock market fund) equally (as a "4") on their 1-to-5 "Risk Potential" chart. And within that rough range, at least VYM is likely to be *more* volatile than VTI.

Your asset allocation and investment choices should be based upon your risk tolerance, not your cash income needs. When you need cash, dividends are irrelevant. Sure, take 'em if your portfolio is producing them, but if it's not, just sell some shares. No big deal. It's called total return investing, and it's the optimal approach.

Even if you did insist on the sub-optimal dividend-only approach, dividend-focused funds don't even help that much. VIG, yielding 2.02%, isn't appreciably different than VTI's 1.80% (VYM's 2.81% is a bit more significant at least).

The purpose of bonds in your portfolio is not actually to provide income. It's so that you have something positive to cling to and don't panic and sell your stocks during a stock market crash. Replacing those bonds with stocks will leave you with nothing to cling to. So figure out how comfortable you'd be in a stock market crash if 100% of your portfolio was invested in stocks, and adjust your allocation to include enough bonds so that you'd be able to sleep at night.

And really, read that Vanguard PDF I linked above. It seems like it was written exactly with you and this thread in mind.

[tjrking]

excellent insight. Thanks for taking the time to respond.

[Ybserp]

I have some international stocks as well, but for 60s it is probably best to keep your money invested in the currency you intend to spend.

[Cashup]

Skyrefuge,

Would you say that a bond fund of pure International Treasuries would be more counter-cyclical to an International share fund than a bond fund that included 40% corporate bonds as well as treasuries?

tjrking,

I don't necessarily agree that turning 60 mandates a more conservative investing bias. At 60 you can reasonably expect to live to 85 which is a long term investment horizon. Obviously your personal circumstances will influence this view but, all things being equal I see no reason to move from a growth bias just because of that age. I agree with Jim's perspective and hold a 70%/30% stocks/bonds portfolio. It's simple, cheap and will probably do as well in the long term as any more actively managed attempt. That's not to say the ride won't be hairy when, not if, the next crash occurs. Then I will adopt my Mustachian principles and modify/substitute my spending, balance into the bonds, seek social security if it gets really bad....but plan to ride it out rather than sell in a panic.

[tjrking]

sound advice.  Thanks for your valuable time.