Being wealthy doesn't mean having all the money in the world, just not having to worry about it.

Has Your Position Changed on Balanced Portfolio?

Question: Several years ago, probably more years than I care to think about, you presented your thoughts on a balanced portfolio that included commodities. The commodities part was not an insignificant percentage, maybe 20%. I jumped right in at that time. At first the commodity part did very well. Here lately, of course, not so well. What would you now include in a balanced portfolio of retirement assets, since after that many years I have retired…sort of?

Answer: My thinking on the use of hedges has changed quite a bit in the decade since I first recommended commodity futures, and that is reflected in many of my posts over the past few years. But I don’t expect everyone to read all of my older posts, so let me bring my thinking up to date:

1. Someone who is about to die faces little danger of running out of money, regardless of his or her portfolio. So I think retirees should plan for a long lifespan. In that light, increases in the cost of living remain a major threat, and short-term volatility needs to be recognized as a secondary consideration.

2. It is now easier to reduce the expected volatility of equities as a result of the new Modern Portfolio Theory mutual funds. So retirees, unless their investments are in taxable accounts with large embedded gains, should consider moving their assets to either the Vanguard Global Minimum Volatility Fund (VMVFX Investor Shares and VMNVX Admiral Shares) or the MSCI Global Minimum Volatility ETF (ACWV) before they consider hedges.

3. The hedges that used to work are now getting so popular that their expected returns have dropped dramatically, to zero or negative real amounts. So I’m far less enamored of them. Where I still hedge for clients, I use a variety of alternatives that need to be monitored and possibly changed; therefore I’m not willing to discuss them on a site intended for DIY investors.

4. For a DIY investor, I think the simplest approach is best. Keep 10% in cash-equivalent investments. Most will earn less than the rate of inflation, and virtually all will earn less than the rate of inflation after taxes, but in a crisis, holding them should reduce worry considerably. Short-term or inflation-protected Treasuries are my own choice, but I don’t see a problem keeping some or all of that 10% in the bank, as long as the other 90% is working hard to grow.

5. For extreme worriers, putting another 5-10% in gold, or in additional Treasuries, is reasonable. The lowest cost Gold ETF, the iShares Gold Trust (IAU), is a good choice.

6. I mentioned some possible twists in earlier posts, but nowadays my elevator recommendation to retirees is pretty much 90% Global Minimum Volatility equities and 10% cash equivalents.