(PUB) Investing 2016

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17 Morningstar FundInvestor April 2016
the portfolio maintenance regimen, as well as spread-
sheets detailing the portfolio’s maintenance and
performance, on Morningstar.com:
Performance Update
In many years of our portfolio simulation, the rebal-
ancing proceeds have been sufficient to meet living
expenses and even top off depreciated positions. In
other years, not so much, and our hypothetical retiree
would need to turn to short-term reserves to supply
living expenses. The years 2014 and 2015 provide good
illustrations of each of those environments. Eight of
our portfolio’s 10 holdings gained value in 2014, led by
our total U.S. stock market index fund, which soared
by more than 12%. Bonds also performed reasonably
well, with both Harbor Bond HABDX and Loomis
Sayles Bond LSBRX kicking in a 5% return apiece. Those
strong returns enabled us to meet our cash flow goal
of $88,111 while also reinvesting in the international
and commodities funds, which dropped in value.
Performance wasn’t nearly as strong in 2015, and
the portfolio declined in value. Just half of our holdings
made it into the black last year, and those returns
were modest: Vanguard Wellesley Income VWINX
was the portfolio’s biggest gainer, with returns of
just 1.28%. The core equity fund in the simulation,
T. Rowe Price Equity Income PRFDX, had a year to
forget, with a nearly 7% loss. (Vanguard Dividend
Growth VDIGX, which is the recommended core
equity position in my actual portfolio, would have per-
formed better; as noted above, it doesn’t have a
long enough history as a diversified equity fund to be
used in a simulation dating back to 2000.) Loomis
Sayles Bond also had a weak year, and the commodi-
ties fund, while a small portion of the portfolio,
continued to bleed red ink. Commodities prices have
recovered in recent months, though it’s anyone’s
guess as to whether that trend will persist.
Because our portfolio lost money in 2015, I turned
to our short-term bond fund, which had gotten fat in
better market years, to both supply the portfolio’s
cash flow and to top off depreciated positions. That
illustrates the key virtue of the bucket strategy—
even in lean market years, cash and other short-term
reserves ensure stability of cash flows.
It’s also worth noting that even with the 2015
losses, the portfolio’s value at the outset of 2016 was
more than $430,000 higher than where it started
out, and it has also supplied roughly $1.19 million in
cash flows. That’s more a testament to strong
stock and bond market performance that has prevailed
during the 16 years of our stress test than it is to
magic with bucketing or, for that matter, any particular
prowess with asset allocation or security selection.
It also illustrates that a 4% initial withdrawal, with
inflation adjustments, is conservative and is designed
to provide sustainable cash flows in a worst-case
scenario market environment. (Most retirees would
rather be safe than sorry when it comes to the
topic of running out of money.) The 16 years in our
stress test, although punctuated with two big
bear markets, were decent.
Holdings Review
I’ve made just one notable alteration to the portfolio
since inception, replacing T. Rowe Price Short-Term
Bond PRWBX with Fidelity Short-Term Bond following
a ratings downgrade on the T. Rowe fund.
Note that Harbor Bond, Harbor Real Return HRRRX,
and Harbor Commodity Real Return HACMX are
all subadvised by PIMCO, which has been in the spot-
light over the past 18 months following Bill Gross’
departure. Morningstar’s analyst team downgraded
Harbor Bond during this period, in part because it
was directly affected by Gross’ departure as well as
broader concerns about personnel stability at the
firm. Harbor Bond still earns a Morningstar Analyst
Rating of Bronze, however, so I left it in the portfolio.
Although these funds have also been affected by
personnel changes at PIMCO, they both have been
lead-managed by Mihir Worah since 2007; senior
analyst Eric Jacobson considers them among the best
options in their respective categories. K
Contact Christine Benz at
Starting Value (1/2000):
$1,500,000
Total Portfolio Withdrawals:
$1,187,080
Ending Value (12/2015):
$1,932,016