How to Invest for Retirement: A Diversified Investment Portfolio

Corey —  September 23, 2009

       If you’ve figured out how much you should be saving for retirement, your next step is to actually start investing the money. Vanguard offers the widest range of low cost index funds available to individual investors. This calculator will help you invest in a diversified portfolio of index funds.

*Note: Click the ‘Click to Edit’ button to use the calculator with your own numbers.

       The dollar amount you should invest is in column E, which you won’t see unless you scroll over. You can use the full screen view or download it as an Excel spreadsheet.

       Depending on your age and the amount you have to invest, you might not be able to use this calculator. If you’re still young, there’s no problem using a 100% stock portfolio until you’re within 25 years of retirement. (That’s my plan. The 120 – your age rule is just a guideline.) You can force the calculator to use a 100% stock portfolio by entering an age of 20 or lower.

       Otherwise, follow the directions the calculator provides. If you have less than $1,000, you should continue saving in a high-yield savings account (like ING Direct’s Orange Savings Account). Until you have more than $3,000, you should use Vanguard’s STAR Fund (#0056). If you have more than $3,000 but not enough to use this calculator, you should use Vanguard’s Target Retirement Funds. Vanguard’s website can help you determine which target retirement fund would be best for you.

Questions about the Portfolio Allocation

       I’ve compiled some responses to typical questions about the portfolio allocation used in this calculator.

       Why so little in U.S. stocks/so much in international stocks? Most investment advisers recommend a large portion of your portfolio be allocated to U.S. companies. Why is this? As far as I can tell, it’s because they have more faith in American companies. The truth is that American companies only make up about 40% of the total world stock market. If you put 80% or more of the stock portion of your portfolio in American companies, you’re basically putting all your eggs in one basket. By diversifying into foreign countries, you mitigate the risk that any one country’s dilemmas will adversely affect the value of your portfolio. Even though foreign stocks tend to move like U.S. stocks in hard times (like right now), they will move quite differently in the long run. This reduces your volatility (risk) and increases your return. (Though I can’t guarantee that, obviously.)

       Why add value stocks? Historically speaking, value stocks have outperformed growth stocks. In some ways, this makes sense logically. Because you’re buying companies that are “undervalued”, you’re getting them at a discount. Once these stocks return to their true values and continue to grow, you end up with a higher return than if you had bought the stock at a fair or high price. Not all Value stocks actually recover and many do go bankrupt or out of business. However, the ones that do recover come back very strong and more than make up for the losers. This is why you would buy a value index fund – you’ll own thousands of companies, so no one company will have a huge effect on your portfolio.

       The bonds don’t seem very diversified to me. What about long-term bonds, global or foreign bonds, high-yield bonds, or government bonds? The bond portion of a portfolio should be there to serve as a safety net. It’s designed to offset the risk you’re taking on by investing in stocks. You shouldn’t use the bond portion of your portfolio to seek extremely high returns, so that rules out high-yield bonds. Long-term bonds give you slightly higher returns than intermediate-term or short-term bonds, but they do so at much higher risk. It’s actually so much more risk that it doesn’t make sense to invest in long-term bonds for the safer portion of your portfolio. Global/foreign bonds and government bonds are not listed separately because they are included in the bond funds I’ve recommended. The two funds both invest in a mix of U.S. and international bonds and government and corporate bonds.

Other Questions

       If you have more questions about the recommendations or investing at Vanguard, feel free to leave a comment below. I’ll be happy to answer your questions.



Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

12 responses to How to Invest for Retirement: A Diversified Investment Portfolio

  1. Wow, Paul, this is pretty cool.

    Also, I found it interesting how very closely its proposal matches my actual portfolio, hehe. :)

  2. Glad you like it, Mike! It’s neat that it matches your current portfolio, but not very surprising given the similarity in our investment approaches.

  3. Hi Paul,

    Can you please comment about choosing a Vanguard Target Retirement Date fund versus personally managing one’s own allocation over time?


  4. Hi, BK! Sure I can comment on that. The Vanguard Target Retirement Date funds are actually a great choice for most people – especially if they don’t want to deal with managing their own allocation. However, I prefer to do it myself for a few reasons. First, I prefer a different allocation among U.S. and Int’l stocks than what Vanguard uses in their target funds. Second, I also like to tilt my portfolio to the value side of things. Third, there may be reasons that their glide path won’t suit a person’s particular situation so they’d be better off doing it themselves. And fourth, if your investments are in a taxable account you’ll have better options for managing taxes if you use your own allocation. (That last one won’t apply to too many people though.)

    The target date funds are certainly the easiest solution but they’re not always the best solution. Honestly, it doesn’t take a lot of work to manage your own asset allocation. I’d say less than an hour a year once you know how.

  5. I am retired and 64. When I plug in my age I get a 20 30 split with more intl than us stocks. Is this too risky an allocation when I am already in retirement. I am currently a Vanguard acct holder.


  6. Hi, Mike. With the globalization of companies and the fact that the U.S. only makes up 40% of the total world stock market, I do not think it is unreasonable to have that allocation. If you’re uncomfortable with it, then simply weight it more to U.S. stocks. Personally, I think you run more risk by putting more emphasis on one country (even one that’s done as well as the U.S.).

  7. Paul.

    Great Tool. And great portfolio.

    My one disagreement is with your bond allocation. With high portfolio equity allocations, Longer-Term Bonds dampen portfolio volatility more then short-term bonds due to negative correlations in recessions. (Reference:

  8. Hi, Paul. Glad you like the tool and portfolio. I checked out the link you mentioned, but I’d need more data from the post you highlighted to know how big of an impact the longer term bonds really had during the recessions. The information the poster included didn’t cover the impact so much as his findings of the more efficient portfolio.

    I would say for anyone who thinks it could be an issue, go ahead and put some in long term bonds. But I wouldn’t put my entire bond portion in long term bonds. Personally, I’d split it up in thirds (short/int/long) if I were going to do that.

  9. Hi Paul,

    What do you think of adding International Small-Cap stocks to this portfolio? Such as this for example: Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares (VFSVX)


  10. Hi, Aaron. I don’t think it would be a bad idea to add VFSVX to the portfolio. You could take some portion of the allocation to foreign stocks and allocate it there as well. Personally, I’d like to see a lower expense ratio on the fund. Also, I’m not sure how much it will add in terms of diversification (lowering risk and increasing return). It’s hard to tell what it would look like historically due to limited data. But I don’t think it would hurt.

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