I am 78 with no db pension but I do have a sep-ira. I'm currently 30% in vwenx and 20% invanguards equity income fund and 50% cash.I'm considering a portfolio of 25% prime,25% vwiax, 25% vwenx and 25% intermediate investment grade bonds. 25% prime will allow me to meet my rmd and possibly pick up bargains in bear markets. And What are "you four investment choices". thank you
Let's analyze what would happen to your asset allocation with such a move. Your VWENX (Wellington Admiral) is composed of 2/3 large cap value equities and 1/3 intermediate investment-grade bonds. Your VEIPX (Equity Income) is all large cap value equities. So overall your current portfolio is 40% large cap value stocks, 10% intermediate investment-grade bonds, and 50% cash.
The portfolio you are considering is composed as following. "prime", I assume, is Vanguard Prime Money Market. VWIAX (Wellesley Admiral) is 1/3 large cap value equities and 2/3 intermediate investment-grade bonds. VWENX (Wellington Admiral) is, of course, same now: 2/3 large cap value equities and 1/3 intermediate investment-grade bonds. And you would have a quarter of your portfolio in VFICX (or its Admiral version, VFIDX) for intermediate investment-grade bonds. So overall your new portfolio would be: 25% large cap value equities, 50% intermediate investment-grade bonds, and 25% cash in Vanguard Prime Money Market.
Effectively, you would move 15% of your current portfolio held in large cap value equities plus 25% of your current portfolio held in cash to intermediate investment-grade bonds. Everything else would stay effectively the same (assuming your cash is already in Prime MM), even if allocated to differently-named funds. This would not be a dramatic change at all. You would be taking some of the risky equities and some of the very safe cash and exchange them for slightly risky intermediate investment-grade bonds. You would lower the overall risk of your portfolio as well as its expected returns but only slightly.
Let's look at how your new portfolio would behave compared to your current one in a repeat of 2008-9 meltdown with a nearly 60% drop in equities and about 10% drop in intermediate investment-grade bonds at their worst points (which did not coincide -- bonds dipped in the fall of 2008 while equities bottomed out in March 2009). You would have 15% less in equities so you would be spared the loss of 60% * 15% = 9% on the equity side. But you would have 25% more in intermediate investment-grade bonds which would drop an extra 10% * 25% = 2.5%. So your new portfolio would bottom out about 6.5% (save 9% on equities but lose 2.5% on bonds, netting 6.5%) higher in absolute terms than your old portfolio. Better, but not dramatically so. Even if we assume that investment-grade bonds don't drop at all even as equities slide the same 60% (which is probably not realistic -- corporate bonds would likely start dropping if their underlying companies were that distressed in a bear market) your new portfolio would only drop 9% less compared to your old one. Again, unlikely to make much difference in the big picture.
And the above paragraph examines about the most favorable scenario possible for the new portfolio. It may well end up going the other way. All bonds, including corporate ones, are close to their all-time highs today, while equities, while also on the pricey side, are certainly nowhere as expensive as they were in 1999 or even 2007. It may end up that bonds deliver near-zero returns for the next few years while interest rates rise and normalize while equities chug along. In that scenario your bonds will end up performing worse than cash and the 15% less in equities would cost you around 2% annually for the next several years.
As you can hopefully tell by now, your new portfolio will simply not be very different from your old portfolio. It may or may not pay off but the difference will be rather slight in either case. Probably on the order of 1-2% per year, either up or down depending on whether or not we hit a new equities bear market. I simply have no clue as to whether this new bear will materialize. I strongly suspect nobody else has a clue either, even though many people seem to have strong opinions. If I had to bet one way or another, I would bet that we will not have a 2008-9 level bear market any time soon but a milder bear (maybe 30% drop in equities from peak to bottom) is certainly quite possible. But the nice thing about investing is that you don't have to bet. You can diversify among both stocks and bonds and be OK in either scenario. You have that diversification with your current portfolio and you would have it with your new portfolio.
If you still feel like your portfolio needs work I would focus not on trying to guess future bear markets, whether in bonds or in stocks, but on how much risk do you really need in your portfolio. You did not mention the overall size of your portfolio or your annual expenses, but reading between the lines, it sounds like RMDs (required minimum distributions) are more than you would voluntarily want to withdraw. If that is the case, then there is a good chance your portfolio is substantial enough that there is not much risk of outliving your money (especially if you also receive Social Security benefits). If so, then it would be logical to lower your overall equity allocation, simply because you don't need to take that extra risk -- regardless of whether that risk materializes or not. It might cost you a bit of growth but if your portfolio is already plenty large relative to your expenses that growth is not particularly important.
Another change to consider -- and this is where those "four investment choices" come in -- is to diversify more broadly, especially in equities. Your bonds are rather undiversified as well, being all corporate and no government, but the fixed income market is sufficiently skewed that this lack of diversification still makes sense. Corporate bonds can be expected to deliver higher returns than similar-maturity treasuries even in very adverse scenarios. This was even more true earlier this year when I wrote http://www.longtermreturns.com/2012/03/q-corporate-bonds-or-us-treasuries.html , but it still holds today. So I would be OK staying exclusively in corporate bonds as you have chosen to do. I'm more skeptical about staying exclusively in large cap value US stocks as you have in your portfolio. I don't think they are a bad holding but I don't see much reason to ignore all the other US stocks as well as all foreign stocks. My investment choices for equities are be the entirety of US stock market is VTSMX (Admiral version: VTSAX) and either the entirety of foreign stock market in VGTSX (Admiral: VTIAX) or squeezing another tiny fraction of a percent in cost from foreign by splitting out foreign developed VDMIX (Admiral: VDMAX) and foreign emerging VEIEX (Admiral: VEMAX). In your specific case you would probably want to continue to keep majority of your stock holdings in US stocks but allow for maybe around a third to be international.
So with international diversification your 40%-in-equities portfolio might look like:
25% Prime MM
35% VFIDX (investment grade intermediate bonds)
13% VTIAX (or 10% VDMAX + 3% VEMAX if you want to split hairs)
And the 25%-in-equities portfolio might look like:
25% Prime MM
To wrap up...
- Your current portfolio is not much different from your proposed portfolio. I think both will do the job and it's impossible to know in advance which will end up ahead.
- Whichever portfolio ends up ahead it is almost certain that it won't be by much since they're so similar.
- I think you would be just fine if you left your portfolio as is.
- If you still feel the need to tinker with your portfolio, then I would look into two areas:
- Analyzing whether your portfolio is so large relative to your living expenses that you simply don't need to take much risk with it and lowering equity allocation as the result.
- Looking to diversify out of US large caps by switching the US equities into VTSMX/VTSAX and adding a smaller chunk in international equities via VGTSX/VTIAX.