This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Makeover Finds High Price for Peace of Mind

By Christine Benz, Morningstar

CHICAGO ( Morningstar) -- Ernesto, a 63-year-old former engineer, is looking forward to a long and happy retirement with a peace of mind most retirees and pre-retirees would find enviable. Having retired seven years ago and still earning some income through periodic consulting work, he relies on a pension that more than covers his day-to-day living expenses. His children are grown, and he owns his home outright. In addition, he has managed to set aside more than $1 million in investment assets.

His investments' conservative positioning meant minimal losses during the bear market. But with more than two-thirds of his portfolio sitting in cash, Ernesto acknowledges he's very likely playing it too safe. "I am uneasy about the opportunity costs I might be incurring," he wrote.

Given that his main goal for his investment portfolio is to leave a legacy for his children rather than fund near-term living expenses, he recognizes that a larger share of his portfolio should be in investments that have the potential to earn a higher return and outpace inflation. At the same time, he's not sure how to execute the shift into longer-term assets, particularly given the stock market's two-plus-year run-up. "The question for me is how to avoid buying high and selling low," he said.
More from Morningstar
The Risk of Playing It Too Safe
How to Get Back in the Market
Get Your Estate Plan in Gear

The before portfolio
Ernesto's portfolio is streamlined and conservative to the hilt, and his long-term investments are all favorites of Morningstar's (MORN - Get Report) fund analyst team.

In addition to holding $837,000 in a money market fund and certificates of deposit earning just 2%, he holds another 17% of his assets in bonds, including Vanguard Inflation-Protected Securities (VAIPX) and Vanguard Intermediate-Term Tax-Exempt (VWIUX). Vanguard Wellesley Income (VWIAX), a conservative-allocation fund, also includes a sizable fixed-income stake.

Equity assets, by contrast, consume just 12% of the portfolio, according to Morningstar's Instant X-Ray tool. Ernesto's sole pure equity offering is Vanguard Dividend Appreciation (VDAIX), which is itself fairly conservative for a stock fund. It focuses on firms that have increased their dividends in each of the past 10 years. Most such names are very large companies, and Morningstar has assigned wide-moat ratings to many of the fund's holdings.

Given the limited equity stake and heavy cash position in Ernesto's portfolio, its recent returns have also been muted, gaining about 4% during the past year, while the S&P 500 gained about 17% during that stretch. With inflation rearing its head of late, Ernesto is wise to worry that higher future prices could gobble up an outsized share of any return his investments are able to generate.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
MORN $80.27 1.20%
AAPL $125.62 -0.30%
FB $87.25 -0.34%
GOOG $525.16 0.44%
TSLA $267.73 -4.30%

Markets

DOW 17,776.98 +93.40 0.53%
S&P 500 2,079.85 +11.09 0.54%
NASDAQ 4,993.2830 +1.3430 0.03%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs