My Investment Picks For Retirees In 2023

I retired in June of last year and am enjoying my new life in Colorado. I have created my bucket list of things to do and nearby places to visit. With more free time available I volunteer to shovel snow for senior citizens.

In this article, I identified quality funds based on metrics and ratings from Mutual Fund Observer and Morningstar. It is divided into the following sections so that readers can skip to sections of interest as follows:

• Portfolio Performance Following Rate Hikes
• Current Investment Environment
• Fixed Income In 2023 (TIPS, Individual Bonds, Bond Funds)
• Equity and Mixed Asset Funds (Large Cap, Mixed Asset, International, Small Cap)
• Closing Thoughts

My intent is to select eight quality funds from different Lipper Categories to give Readers the opportunity to select funds based on their own risk tolerance and perception of the investment environment.

Portfolio performance following rate hikes

I used Mutual Fund Observer and Portfolio Visualizer to identify funds that did relatively well during the time periods when the Federal Reserve stopped raising rates and before the onset of a recession.

Chart #1: Federal Funds Rate

I then created a portfolio from a list of seventeen funds to “Maximize Return with 8% Volatility” and to “Maximize the Sharpe Ratio” for the time period from November 2018 to December 2019 representing flat to declining Federal Funds rates before the onset of a recession. These are compared to the Vanguard Balanced Fund (VBIAX). The link to Portfolio Visualizer is provided here.

Prior to a recession starting, maximizing the return using equity may outperform the less volatile approach. It appeared in 2019 that a soft landing would be achieved until the pandemic forced a recession.

Chart #2: Portfolio Optimization November 2018 to December 2019

I then ran Portfolio Visualizer to backtest the same two portfolios with the time extended to the end of the bear market in March 2020. All three ended with about the same overall return. With so many risks in the current environment, I prefer to be overweight in bonds, especially with yields at these high levels.

Chart #3: Portfolio Visualizer Backtest Portfolio

Table #1 shows the construction of the two portfolios and the baseline Vanguard Balanced Fund (VBIAX). Note that the “Maximize Return” portfolio has sixty percent allocated to stocks which is similar to VBIAX. The “Maximum Sharpe Ratio” only has sixteen percent allocated to stocks. I am at my minimum allocation to stocks of 35% because the current high yield of bonds provides a less risky alternative to stocks.

Table #1: Portfolio Backtest Funds and Exposures

Symbol	Name	Maximum Return at 8.00% Volatility	Maximum Sharpe Ratio	VBIAX
DODIX	Dodge & Cox Income	10%	10%
COTZX	Columbia Thermostat	10%	10%
DODLX	Dodge & Cox Global Bond	10%	10%
XLP	Consumer Staples	10%
VTV	Vanguard Value ETF	10%
VIGI	Vanguard Intl Div Appr	10%
DIVI	Franklin Intl Core Div Tlt	10%
FLLV	Franklin Liberty U.S. Low Vol	10%
DIVO	Amplify CWP Enh Div Inc	10%
VTEB	Vanguard Tax-Ex Bond	10%
FSTGX	Fidelity Interm Gov Inc		10%
PCBAX	BlackRock Tact Oppor		10%
RPIEX	T. Rowe Price Dyn Global Bond		10%
VTEB	Vanguard Tax-Ex Bond		10%
BMNSX	Baird Core Interm Muni Bd		10%
DIVI	Franklin Intl Cor Div Tilt		10%
ARBIX	Absolute Conv Arb		10%
	US Stocks	40%	4%	59%
	International Stocks	20%	12%	1%
	US Bonds	29%	54%	36%
	International Bonds	7%	8%	3%
	Other	1%	10%	0%
	Cash	3%	13%	1%

Click to enlarge

Source: Author Using Portfolio Visualizer

2023 Investment environment

I track timely indicators on a weekly basis including the KC Fed Labor Market Conditions Index, the yield curve, and the Weekly Lewis-Mertens-Stock Economic Index. Labor conditions and economic growth are below their long-term trend, and the yield curve is strongly inverted. The US economy is moving closer to a recession.

Tajinder Dhillon at Lipper Alpha Insight wrote “S&P 500 Q4 2022 Earnings Preview: A Reset in Growth Expectation” which describes forecasts that earnings will decline in the fourth quarter of 2022 by -2.2% year over year and -3.6% compared to the third quarter.

In addition to declining profits, high inflation, rising rates, the possibility of a recession, Russian invasion in Ukraine, and deglobalization, there is political drama about the Federal debt ceiling. Natasha Solo-Lyons at Bloomberg reported that Treasury Secretary Janet Yellen warned the Treasury “will begin taking special accounting maneuvers on January 19 to avoid breaching the US debt limit, urging lawmakers to boost the ceiling to avert a devastating payments default.” “The Looming Debt Ceiling Crisis” by Richard McGahey in Forbes describes the current political climate that is likely to increase volatility in the first half of the year. One bipartisan solution that I believe has potential is reported by Sara Dorn at Forbes which is to tie the debt limit to gross domestic product.

Fixed income in 2023

Last year as interest rates were rising, I began using the Fidelity Fixed Income, Bonds & CDs Search tool to build ladders of short-term Treasuries and certificates of deposit. As the rates of longer duration bonds became attractive, I began increasing duration to match withdrawal needs in order to reduce drawdown risk in the future. I expand on buying individual bonds in this article.

Don’t Fight the Fed

Chart #4 shows how the yield curve behaved before and after the Federal Reserve raised interest rates on December 14th. The 10-year Treasury yield fell from nearly 4.2% to about 3.5% and rebounded after the announcement to about 3.9% before falling to nearly 3.4%. As short-term Treasuries and certificates of deposit mature in my portfolios, I have been investing the funds in longer duration Treasuries locking in returns higher than 4%. The Federal Reserve’s next rate hike announcement will be on February 1st where they are expected to raise rates by a quarter percent. Volatility may present opportunities along with risks.

Chart #4: Yield Curve Before and After December 14th Rate Hikes

Treasury Inflation Protected Bonds

Devesh Shah wrote “Long-dated TIPS bonds: A Margin of Safety” in the Mutual Fund Observer January Newsletter that describes why TIPs did not perform well in 2023 in spite of inflation but are situated for better performance going forward. TIPs are indexed to the Consumer Price Index so that if inflation is higher, the yields will increase; however, they carry rate risk. Of the Inflation protected bonds, short duration TIPs made no money in 2022 as rates rose, while longer duration inflation bonds lost. He provides some good arguments for why TIPs may perform well in the future. I study this idea below.

Treasury Inflation Protected funds are relatively new. I used Portfolio Visualizer to compare the performance of short (STPZ), intermediate (TIPZ) and long duration (LTPZ) ETFs for the past thirteen years in Chart #5. The link to Portfolio Visualizer is provided here.

Chart #5: TIP Performance by Duration

Over the past thirteen years, inflation and the Federal Funds rate had a correlation of 0.69. This means that if inflation goes up the Federal Reserve raises interest rates to cool the economy. Inflation protected bonds are negatively correlated to the inflation rate, but even more negatively correlated to the Federal Funds rate. It seems counterintuitive that if inflation goes up, TIPS have negative returns, but it makes more sense that when the Federal Funds rate goes up to combat inflation then longer duration bonds have negative returns.

Chart #6: Annual Performance of TIPs Compared to CPI and Fed Funds Rate

Chart #7 shows a scatter plot of the PIMCO 15+ Year US TIPS ETF (LTPZ) to the annual change in the Federal Funds Rate. The correlation is 0.57. The higher the Federal Funds rate rises the further LTPZ falls.

Chart #7: TIPs vs Change in Federal Funds Rate

Inflation appears to have plateaued with interest rates high and likely to begin falling by 2024. This is a good reason to increase allocations to bonds, but why buy inflation protected bonds over bonds with nominal yields? Chart #8 shows how the Vanguard Long-Term Bond ETF (BLV) compares to the PIMCO 15+ Year US TIPS ETF (LTPZ). While both returns end up at essentially the same place over the thirteen-year period, the long-term TIP performs better during inflationary periods.

Chart #8: Nominal Bond Fund Performance vs TIPs

I believe that deglobalization, costs associated with climate change, and depletion of natural resources will lead to higher inflation over the next few decades. I have been buying nominal treasuries because of the higher rates to match with withdrawal needs. I will supplement this approach to include individual intermediate Inflation Protected Treasury bonds that I can hold to maturity to match withdrawal needs. Inflation Protected ETFs that I currently track are shown below:

Table #2: Inflation Protected Funds

Symbol	Name	Yield %/yr	30d Yield %	Div Freq	Effective Maturity Years	AUM $M	APR 3mo %	APR 2022 %
VTIP	Vanguard Short-Term Inf-Prot Sec	6.8	2.3	Quarterly	2.5	53,609	1.2	-2.9
TDTT	Northern Trust FlexShares iBoxx 3-Yr Target Dur	7	6.6	Monthly	3.5	2,045	1.3	-4.6
TIPX	State Street 1-10 Yr TIPS	6.1	1.6	Monthly	4.6	1,363	1.4	-7.6
TDTF	Northern Trust FlexShares iBoxx 5-Yr Trgt Dur TIPS	7.6	6.4	Monthly	6	716	1.7	-9.5
SPIP	State Street SPDR Portfolio TIPS	7.1	1.6	Monthly	7.6	2,237	1.9	-12.8
LTPZ	Allianz PIMCO 15+ Yr US TIPS	8.4	6.9	Monthly	22.3	631	4.7	-31.6

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Chart #9: Inflation Protected Funds

Searching for Higher Yields with Safety

Because Ten-year yields on Treasuries have fallen from around 4% to 3.4%, I have been searching for higher yields but without much more risk. Table #3 is the average yield derived from Fidelity for bonds with call protection. The lower part of the chart shows the spread between agency and corporate bonds compared to Treasuries. Municipal bond spreads are compared to the highest rated municipal bond funds. Up to three years duration, Treasuries appear the most attractive given the likelihood of a recession. Beyond that, quality agency and corporate bonds have potential.

Table #3: Average Bond Yields and Spreads

I used the Fidelity bond screen to identify individual bonds offering competitive yields for their rating with call protection. I then used the Fidelity stock screen to eliminate companies with high debt to equity ratios. Table #4 contains my short list. I will continue to match the maturities with withdrawal needs.

Table #4: Bond Ratings

Description	Moody’s Rating	S&P Rating
Treasuries	AAA
Federal Farm Credit Banks	AAA	AA+
Federal Home Loan Banks	AAA	AA+
Federal National Mortgage Association	AAA	AA+
Tennessee Valley Authority	AAA	AA+
Berkshire Hathaway	AA2	AA
Pfizer	A1	A+
Paccar Financial Corp	A1	A+
Bank New York Mellon Corp	A1	A
Northern Trust Corp	A2	A
US Bank Corp	A2	A
National Rural	A2	A-
State Street	A2	A-
Bank Of America	A2	A-
PNC Bank	A3	A-

Click to enlarge

Source: Author Using Fidelity

Bond Funds

After matching bonds with withdrawal needs, I prefer bond funds for remaining allocations. Below are my highest ranked quality bond funds. The names shaded blue signify that the funds are classified as a Great Owl fund by Mutual Fund Observer.

Table #5: Author’s Selected Top-Ranked Bond Funds

Symbol	Name	Lipper Category	MFO 3 Year Rating	Morningstar Rating	% Total Return 3 Month	30d Yield %
RPIEX	T Rowe Price Dyn Glbl Bond	Absolute Return Bond	5	5	-2.1	6.7
TDTF	Northern Trust 5-Year Target Duration TIP	Inflation Protected Bond	3	4	3.7	6.4
KORP	American Century Diver Corp Bond	Core Plus Bond	5	5	6.8	4.9
DODIX	Dodge & Cox Income	Core Bond	5	5	8.6	4.2
FUAMX	Fidelity Interm Treasury Bond	U.S. Treasury General	5	4	6.4	3.8
FSTGX	Fidelity Interm Gov Income	U.S. Gov Short-Interm	1	4	3.1	3.7
MFAEX	American Funds Mortgage	U.S. Gov Intermediate	5	5	7.7	3.0
VTEB	Vanguard Tax-Ex Bond Index	Muni Gen & Insured Debt	4	3	6.4	3.4
BMNSX	Baird Core Interm Muni Bond	Muni Interm Debt	4	3	5.1	3.0

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Chart #10 shows historical performance of these bond funds.

Chart #10: Author’s Selected Bond Funds

Bullish Bond Funds

I created a screen at Fidelity to identify exchange traded funds that are bullish using technical indicators such as Moving Average Convergence Divergence. I narrowed the list to eight funds shown in Table #6 based on quality rating and volatility among other preferences. I show alternative funds based on my rating system.

Table #6: Bullish Bond Funds

Sym-bol	Name	Lipper Category	Yield %/yr	30d Yield %	Ulcer Indx	APR 3mo %	MFO Rating 3 Year	Morning-star	FactSet	Author’s Alternative
QLTA	BlackRock iShares Aaa – A Corp Bond	Corp Debt A Rated	2.8	4.75	8.6	2.98	3	3	A
BIV	Vanguard Interm-Term Bond	Core Bond	2.4	4.43	7.3	1.90	3	4	A	FTBFX
JAGG	JPMorgan U.S. Agg Bond	Gen Bond	2.2	3.99	7.2	1.59	2	3	A	BAB
VGIT	Vanguard Interm-Term Treasury	U.S. Gov Interm	1.7	3.85	6.5	0.98	3	4	A	MFAEX
SPTI	State Street Port Interm Term Treasury	U.S. Treas Gen	1.4	3.75	6.5	1.01	5	4	A	FUAMX
CMBS	BlackRock iShares CMBS ETF	U.S. Mort	2.6	3.66	6	0.90	3	4	A	LMBS
MMIT	NY Life IQ MacKay Muni Interm ETF	Muni Interm Debt	2.3	3.11	4.7	4.07	4	5	B	FLTMX
SPIP	State Street Port TIPS	Infl Prot Bond	7.1	1.59	5.2	1.92	2	3	A	VTIP

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Chart #11: Bullish Bond Funds

Equity and mixed asset funds

Over the next few years, I expect value to outperform growth, small cap to outperform large cap, and global to outperform domestic funds, but these will probably be more volatile. For this reason, I have included the categories below.

Large and Multi-Cap Value Funds

Table #7 contains my top-ranked large and multi-cap equity funds.

Table #7: Author’s Selected Top-Ranked Large and Multi-Cap Funds

Symbol	Name	MFO 3 Year Risk	MFO 3 Year Rating	Morningstar Rating	% Total Return 3 Month	30d Yield %
COWZ	Pacer US Cash Cows 100	4	5	5	11.7	2.2
NOBL	ProFunds S&P 500 Div Aristocrats	4	5	5	13.3	2.0
VTV	Vanguard Value Index	4	4	5	12.7	2.5
FNDX	Schwab Fund U.S. Large Company Index	4	5	4	12.1	2.1
PRF	Invesco FTSE RAFI US 1000	4	5	4	11.9	2.0
FNDB	Schwab Fund U.S. Broad Market Index	4	5	4	12.4	2.0
MFUS	Allianz PIMCO Dyn Multi-Factor US Eq	4	5	4	11.6	2.2
CDC	VictoryShares US EQ Inc Enh Vol Wtd Indx	4	5	5	7.2	3.8

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Chart #12: Author’s Selected Large and Multi-Cap Value Funds

Mixed-Asset Funds

Like many retirees, I like to keep things simple and favor mixed-asset funds. The table below shows Risk (Ulcer Index) and Risk-Adjusted Returns (Martin Ratio) from Mutual Fund Observer for the past three years. I show the highest rated funds from my ranking system. They are sorted from lowest risk to highest.

Table #8: Author’s Selected Top-Ranked Multi-Asset Funds

Symbol	Name	MFO 3 Year Risk	MFO 3 Year Rating	Morningstar Rating	% Total Return 3 Month	30d Yield %
VWIAX	Vanguard Wellesley Income Admiral	2	5	5	9.4	4.1
REMIX	Standpoint Multi-Asset	2	5	5	-0.1
COTZX	Columbia Thermostat	2	4	5	7.4	1.7
FAPTX	American Funds 2025 Target Retire	3	5	5	9.4	1.6
VTMFX	Vanguard Tax Managed Balanced	3	5	5	6.9	2.5
TRRIX	T Rowe Price Retire Balanced	3	5	4	7.2	1.5
VGYAX	Vanguard Global Wellesley Income	3	5	5	11.3
FSDIX	Fidelity Strategic Div & Income	4	5	5	10.4	2.9

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Vanguard Wellesley Income (VWIAX) is my safe haven fund because it has a conservative allocation to stocks and is domestic. I also own Vanguard Global Wellesley Income (VGYAX) for global diversification. While Standpoint Multi-Asset (REMIX) has been a good performer, it can have large daily swings. I also like Columbia Thermostat (COTZX, CTFAX) because it increases allocations to stocks as the market falls.

Chart #13: Author’s Selected Top-Ranked Multi-Asset Funds

Global and International Equity Funds

The Federal Reserve was more aggressive raising short-term rates than many countries. As they slow down the pace of increases, the dollar may weaken, which will favor international equities which also have lower valuations. BlackRock Tactical Opportunities (PCBAX) is interesting for its low drawdown. State Street S&P Emerging Markets Small Cap (EWX) is also interesting to watch for expected higher growth of emerging markets.

Table #9: Author’s Top-Ranked Global and International Equity Funds

Symbol	Name	MFO 3 Year Risk	MFO 3 Year Rating	Morningstar Rating	% Total Return 3 Month	30d Yield %
PCBAX	BlackRock Tactical Opportunities	2	5	5	1.7	5.3
DIVI	Franklin Intern Core Div Tilt	4	5	5	25.5	4.4
FMIEX	Wasatch Global Value	4	5	5	17.7	2.2
ISDX	Invesco RAFI Strategic Dev ex-US	4	5	5	21.0	2.7
VIGI	Vanguard Intern Dividend Appreciation	4	4	4	18.1	0.0
FGILX	Fidelity Global Equity Income	4	5	5	12.1	1.1
IOO	BlackRock iShares Global 100 ETF	4	5	5	9.3	1.8
EWX	State Street S&P EM Markets Small Cap	4	5	4	14.0	4.6

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Chart #14: Author’s Top-Ranked Global and International Equity Funds

Small and Mid-Cap Equity Funds

Of the small and mid-cap equity funds, Horizon Kinetics Small Cap Opportunities (KSCOX) stands out for its high growth, but also its high volatility. Palm Valley Capital (PVCMX) is another interesting fund because it has had decent three year returns with low drawdown.

Table #10: Author’s Top-Ranked Small and Mid-Cap Equity Funds

Symbol	Name	Lipper Category	MFO 3 Year Risk	MFO 3 Year Rating	Morningstar Rating	% Total Return 3 Month
PVCMX	Palm Valley Capital Inv	Small-Cap Growth	2	5	5	4.5
KSCOX	Horizon Kinetics Small Cap Opport	Global Small/Mid Cap	5	5	5	6.5
BOSOX	Boston Trust Walden Small Cap	Small-Cap Core	4	5	5	11.2
JPME	JPMorgan Diver Rtrn US Mid Cap	Mid-Cap Core	4	5	4	12.0
FLPSX	Fidelity Low-Priced Stock	Mid-Cap Value	4	4	5	12.2
VIMCX	Virtus KAR Mid-Cap Core	Mid-Cap Growth	4	5	5	12.4
QRSVX	FPA Queens Road Small Cap Value	Small-Cap Core	4	5	5	13.3
ONEV	State Street Russell 1000 Low Vol	Mid-Cap Core	4	5	5	13.5

Click to enlarge

Source: Author Using Mutual Fund Observer and Morningstar

Chart #15: Author’s Selected Top-Ranked Small and Mid-Cap Equity Funds

Closing thoughts

I expect 2023 to be a volatile year and believe stocks will see new lows and am underweight equities. I changed my investment approach when yields increased by buying individual bonds to match withdrawal plans. As a result, I will reduce how much I have invested in mixed asset funds. The funds in this article form my watchlist for 2023. I am going to concentrate on buying fixed income in the near term and shifting more to equities after the yield curve starts to steepen.

Best wishes investing in 2023.