Model Vanguard Portfolios for Short- and Intermediate-Term Goals
With ultralow costs, Vanguard is a wonderful place to invest for spending goals that are close at hand.
“What about us Vanguard investors?”
That was one of the pieces of feedback from my recent article about short- and intermediate-term portfolios, which mainly leaned on Fidelity funds for their fixed-income holdings. But Vanguard also fields a terrific lineup of core bond funds that lend themselves to building an investment portfolio for short- or intermediate-term spending horizons. Better still, Vanguard’s funds are even cheaper than peer funds with similar credit qualities and interest-rate exposures. That means they can generally take less risk but still deliver income streams and, in turn, long-term returns, in line with their peers’.
About the Portfolios
I used Morningstar’s Role in Portfolio framework, which maps investments to various time horizons/holding periods, as the backbone of these portfolios. That framework separates mutual funds into one of four holding periods: short (a holding period of one to two years), short/intermediate (two to six years), intermediate (six to 10 years), or long (more than 10 years). To categorize investments, Morningstar looks at the worst time period—from peak to trough to eventual recovery—as well as how frequently those losses have occurred. In other words, if you put your money into an investment, how likely are losses, and how long would it take you to get back to breakeven after the investment has lost money?
The short-term portfolios featured here are geared toward investors with time horizons to spending of two to six years. (As such, they’re composed of cash as well as holdings that are considered short-term and short/intermediate-term in Morningstar’s Role in Portfolio framework. (Investors with very short time horizons—less than two years—should simply hold cash-type investments rather than bonds.)
For the intermediate-term portfolios, I assumed a time horizon to expenditure of between six and 10 years. Thus, the portfolios consist of cash as well as a combination of short-term and intermediate-term investments.
Because many investors save for short- and intermediate-term goals outside their retirement accounts, I’ve created portfolios for both taxable and tax-sheltered accounts. The portfolio holdings all earn Morningstar Medalist Ratings from our analyst team.
How to Use Them
My key goal with these and all of my model portfolios is to depict sound asset-allocation and portfolio-management principles rather than to shoot out the lights with performance. For short- and intermediate-term goals, especially, many investors would rather be safe than sorry. Thus, capital preservation and inflation protection are key goals, but portfolio growth is less of a priority. Investors can use the portfolios to help size up their own portfolios’ asset allocations and suballocations. Alternatively, investors can use the portfolios as a source of ideas in building out their own portfolios.
Note that the short-term portfolios include a range of percentages. Investors with shorter time horizons—say, three years—should consider emphasizing cash and short-term bonds and can go without an intermediate-term allocation. But investors whose time horizons to spending are closer to six years might have heavier allocations to short- and intermediate-term bonds.
Short-Term Portfolio for Taxable Investors
Anticipated Time Horizon to Spending: 6 Years or Fewer
Risk Tolerance/Capacity: Low
- 20%-40%: Cash/Vanguard Municipal Money Market VMSXX
- 40%-60%: Vanguard Ultra Short-Term Tax-Exempt VWSUX
- 0%-20%: Vanguard Intermediate-Term Tax-Exempt VWIUX
Short-Term Portfolio for Tax-Sheltered Investors
Anticipated Time Horizon to Spending: 6 Years or Fewer
Risk Tolerance/Capacity: Low
- 20%-40%: Cash/Vanguard Federal Money Market VMFXX
- 40%-60%: Vanguard Short-Term Bond Index/ETF VBIRX/BSV
- 0%-20%: Vanguard Intermediate-Term Bond Index/ETF VBIlX/BIV
Intermediate-Term Portfolio for Taxable Investors
Anticipated Time Horizon to Spending: 6-10 Years
Risk Tolerance/Capacity: Low-Moderate
- 20% Cash/Vanguard Municipal Money Market
- 40% Vanguard Short-Term Tax-Exempt
- 40% Vanguard Intermediate-Term Tax-Exempt
Intermediate-Term Portfolio for Tax-Sheltered Investors
Anticipated Time Horizon to Spending: 6-10 Years
Risk Tolerance/Capacity: Low-Moderate
- 20% Cash/Vanguard Federal Money Market
- 40% Vanguard Short-Term Bond Index/ETF
- 40% Vanguard Intermediate-Term Bond Index/ETF
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