Rational Investing Portfolio
Detailed in the Work Less Live More book for long-term retirees, the Rational Investing Portfolio is designed to provide sustainable withdrawals with low volatility across a 40-year+ retirement horizon. 16 asset classes ensure wide diversification and exposure to most liquid financial securities markets to generate low-volatility returns a retiree can live on over several decades. Readers will find a full discussion including extensive historical testing, academic foundations for the portfolio and an early-retiree focused withdrawal strategy detailed in the Work Less Live More book.
FINANCIAL UPDATES FOR THE WORK LESS, LIVE MORE RATIONAL INVESTING (RIP) PORTFOLIO: 2006 to 2015 (previous history available in the book)
10-year compounded return 2006-2015: 5.4%
10-year compounded return after annual 4% withdrawals (5.1% in 2009**) and after adjusting for inflation: 1.2%
(historical data sources courtesy Modera Asset Management)
Asset Classes and percentages
US Large 12%
US Small 9%
Int'l Large 5%
Int'l Small 10%
ST Corp 4%
LT Treasury 4%
Int Term US 10%
Int'l Bond 12%
High Yield 4%
Oil & Gas 3%
Market Neutral 2%
Commercial Real Estate 5%
Private Equity 5%
the Sandwich Portfolio- Sometimes Less IS MORE:
8 Funds plus a Money Market Account
Portfolio Charts has included the Sandwich Portfolio in their roster of retirement-friendly portfolios. Valuable analytic tools for assessing how this portfolio compares to others.
The second portfolio from the book, designed to be simpler, has 8 asset classes and a money market fund, with all but one fund available through Vanguard (chosen as representative of, but by no means exclusively, the investing options suitable for long term retirees) This Portfolio has fewer of the less-correlated or esoteric 'alternative' asset classes.
FINANCIAL UPDATES FOR THE WORK LESS, LIVE MORE SANDWICH PORTFOLIO: 2006 to 2016 (previous history available in the book)
11 Year compounded return: 6.25%
11 year compounded return after taking 4% annual withdrawals (5% in 2009**) and adjusting for inflation: 2.1%
(historical data source: Morningstar, Vanguard, and are net of fees)
This is the simple version of the Rational Investing Portfolio used throughout the Work Less Live More long term retiree planning in the books. It consists of the following 8 low-fee and readily available funds plus a Money market fund:
20% VFINX S&P500
8% VTMSX Tax Managed Small
6% VGTSX Total International Equity
10% VINEX Internat'l Explorer (small)
6% VEIEX Emerging Markets
30% VBIIX Intermediate Bond Index
11% BEGBX International Bond
5% VGSIX REIT Index
4% Money Market Fund
These allocations continue to be the same as those published in the book. The author personally continues to follow the full Rational Investment Portfolio (since 2003), though he recognizes that in recent years the commodities and large foreign holdings have weighed on returns. For greater diversification he also has been investing in the hedge fund sector which he feels with judicious selection can be worth the high fees, especially for credit market strategies, since interest rates are now so low. He has also switched many investments from mutual funds to ETFs which he believes have significant advantages for the long term investor. Click here for a discussion of this portfolio and its performance on the early-retirement.org forums
** Note that these withdrawals correspond to the Safe Withdrawal Methods outlined in the book, which include a 95% Rule for smoothing out adjustments after asset values have fallen significantly. This was the situation in 2009 during which the 95% Rule indicated a 5.0% (Sandwich) and 5.1% (RIP) withdrawal be taken that year.
Also note that all returns here are based on the assumption of annual rebalancing of portfolios back to the target allocations on January 1 of each year, for ease of calculation. Individuals will of course choose different rebalancing and thus their performances may vary.