(PUB) Investing 2016

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17 Morningstar FundInvestor January 2016
Their total portfolio is listing toward the growth side of
the Morningstar Style Box, with 43% of assets landing
there. Healthcare stocks are a big overweighting.
The After Portfolio
Norm and Peggy estimate that they’ll need about
$10 ,500 per month to maintain their current standard
of living in retirement, and various fixed sources of
income will step in to supply a healthy share of that
cash flow. Peggy will earn roughly $3,000 a month
from her pension, while Norm’s pension will kick in an-
other $1,500 per month. Norm’s Social Security
will contribute another $2,600 per month in cash flow,
provided he waits until his full retirement age to
file for benefits. Thus, the two pensions and Social Sec-
urity will supply roughly $7,100 of their desired
monthly income in retirement. Norm’s annuity will sup-
ply an additional component of income when he
annuitizes, and his part-time job will kick in an addition-
al income component as long as he continues working.
They’ll need to draw their additional cash require-
ments from their portfolio, so my aim for the “after”
portfolio was to reduce its risk level without forsaking
growth. My “after” portfolio brings more balance to
their equity stake by boosting their position in high-
quality, dividend-paying equities. The “after” portfolio
also includes more stand-alone, plain-vanilla bond
positions, because part of the fixed-income exposure
in their “before” portfolio is embedded in balanced
and other multiasset funds. Maintaining distinct bond
and stock positions will allow them to use rebalancing
to shake out additional cash.
Because I’m anticipating that Peggy will roll her 403(b)
into her Traditional IRA upon retirement, I positioned
the two accounts as one from an asset-allocation stand-
point. Thus, I focused her American Funds 403(b)
largely on equity and allocation funds—which tend
to be better options in the firm’s lineup—while down-
playing bonds. Meanwhile, I boosted bonds in her
Tra-ditional IRA , employing standout core bond funds
from Fidelity as well as Fidelity Strategic Real
Return FSRRX, an all-in-one inflation hedge. I looked
to her Roth IRA to deliver straight-ahead equity
exposure, both domestic and foreign, because her time
horizon for that piece of the portfolio will be longer.
Norm’s 401(k), meanwhile, includes a number of
fine holdings, all of them actively managed. Because
many of the 401 (k) options are closed to new invest-
ors, it’s not a given that Norm would roll over his 401(k)
into an IRA upon retirement. I retained many of
Norm’s original 401(k) holdings in my “after” portfolio,
but I jettisoned some of the most specialized,
including Fidelity Mega Cap Stock FGRTX and Fidel-
ity Select Pharmaceuticals FPHAX . My most
significant change in the 401(k) was to replace Fidelity
GNMA FGMNX—a fine holding in its own right—
with Fidelity Total Bond FTBFX, which provides bet-
ter-diversified core fixed-income exposure.
Because so much of Norm’s 401(k) is idiosyncratic,
I aimed to smooth out its risks by employing index
funds in his IRA . As with Peggy’s Roth, broad-market
index funds, both U.S. and foreign, deliver well-
diversified equity exposure at a very low cost. K
Contact Christine Benz at
After Portfolio
Holding Market Value Weight
Peggy’s 403(b): American Funds Capital World Bond CWBFX $25,000 2.25%
Peggy’s 403(b): American Funds Capital World Growth&Inc CWGIX $120,000 10.78%
Peggy’s 403(b): American Funds Income Fund of America AMECX $75,000 6.74%
Peggy’s 403(b): American Funds AMCAP AMCPX $69,932 6.28%
Peggy’s Traditional IRA: Fidelity Short-Term Bond FSHBX $38,097 3.42%
Peggy’s Traditional IRA: Fidelity Total Bond FTBFX $75,000 6.74%
Peggy’s Traditional IRA: Fidelity Strategic Real Return FSRRX $25,000 2.25%
Peggy’s Roth IRA: Fidelity Spartan Total Market Index Adv FSTVX $50,000 4.49%
Peggy’s Roth IRA: Fidelity Spartan Global ex-US Index Adv FSGDX $20,359 1.83%
Norm’s 401(k): BBH Core Select BBTEX $65,000 5.84%
Norm’s 401(k): Fidelity Total Bond FTBFX $75,000 6.74%
Norm’s 401(k): Fidelity Small Cap Discovery FSCRX $35,000 3.14%
Norm’s 401(k): Fidelity Floating Rate FFRHX $14,691 1.32%
Norm’s 401(k): Fidelity New Markets Income FNMIX $25,000 2.25%
Norm’s 401(k): Oakmark International OAKIX $50,000 4.49%
Norm’s Traditional IRA: TIAA-CREF Social Choice Equity TICRX $39,835 3.58%
Norm’s Traditional IRA: TIAA-CREF Traditional Annuity $225,008 20.21%
Norm’s Roth IRA: Fidelity Spartan Total Market Index FSTVX $55,275 4.97%
Norm’s Roth IRA: Fidelity Spartan Global ex-US Index FSGDX $30,000 2.69%
$1,113,197 100.00%