Asset Allocation in Retirement – Vanguard CEO Explains

Asset allocation in retirement is on the minds of many aging boomers. What proportion of their money should retirees invest in each of stocks and bonds?

In their three-minute 2017 video interview, then Vanguard CEO Bill McNabb and Vanguard Chief Investment Officer Tim Buckley shared their thoughts on asset allocation in retirement with interviewer Rebecca Katz. Although the video is no longer available, their advice remains valuable.

Asset Allocation in Retirement – Video Summary

Understanding your own risk profile is essential. If you are uncomfortable with the value of your investments dropping in value then you will want to invest more in bonds.

A retiree should seriously consider their life expectancy and that of their spouse. Inflation will erode real values over longer periods. Growth stocks can fight this effect. Bill McNabb explains,

“If you take an average couple, age 65, there’s a better than 50% probability that one of them is going to live more than 25 years…even in retirement, you have to have some hedge against inflation. You need growth. But, in a sense, the less volatility you can handle, the more you have to have in fixed income in terms of balancing your portfolio.”

As interest rates have declined, bond values have increased. Increasing interest rates will reduce bond values. On the other hand, bonds provide predictable income.

Bonds are not the growth investments in your portfolio. Using a sailboat in a storm analogy, equities provide the wind for the sails while bonds provide portfolio ballast and stability.

The Vanguard CEO explains longer term implications of bond returns in a rising interest rate environment,

“But what you really need to think about is as long as your time horizon is longer than the duration of your bond portfolio, you actually want rates to go up because you’re going to be reinvesting at higher and higher yields. And, actually, when you do the math on this, you’re better off. And this is completely contrary to the way most people look at bond funds.”

Although bond prices decrease when interest rates rise, it is important to understand that when an investor’s time horizon is longer than the duration (weighted average time to maturity of your bond investments) of the investor’s bond investments, the investor will actually realize a higher return if interest rates rise. As the bonds mature, the investor benefits by investing at higher rates.

The convertible bond category is another investment possibility in a rising interest rate environment.

You can also learn what Vanguard fund managers think about international mutual funds and ETFs.

NB. Shortly after the interview, Tim Buckley was promoted to CEO.