|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Thirty years ago this week, I began working at Morningstar. Don’t worry–I’m not going to spend this issue of Smart Investor tripping down memory lane. (However, those interested in taking a ride in the way-back machine can see what the fund industry looked like in the 1990s in this article.) Instead, I’d like to share my biggest takeaway from three decades of covering mutual funds, exchange-traded funds, and stocks, which is:
Most investors should keep things simple.
I know, that’s awfully anticlimactic. Did it really take me 30 years to figure that out? OK, maybe it really only took 25 years. But it took me a while to recognize a few things. First, the financial industry has evolved in a way that makes getting low-cost, broad exposure to various asset classes quite easy. Second, it’s important to diversify, but diversification has its limits during the accumulation stage if you have a long enough runway to needing the money. And lastly, even investing junkies can stand to benefit from simplifying their core portfolios, freeing up time they can use to invest their mad money.
You can keep things extremely simple by owning one age-appropriate target-date fund and calling it a day–target-date strategies provide exposure to U.S. stocks, international fare, and bonds (and in some cases, other asset types, too). If you’re interested in being more hands-on with your asset mix, however, you can craft a simple three-fund portfolio that will give you plenty of diversification and will likely get you where you need to go, assuming you maintain an appropriate savings rate.
To commemorate my 30-year anniversary, here are 30 (or so) building blocks you can choose from to assemble a three-fund portfolio. These funds earn Morningstar Analyst Ratings of Gold and hail from what many consider to be the three “core” Morningstar Categories of funds to use when building minimalist portfolios. (Disclosure: I own Vanguard Institutional Index Fund (VINIX).)
U.S. Large Blend: American Funds Washington Mutual (AWSHX), Fidelity 500 Index (FXAIX), Fidelity Total Market Index (FSKAX), FMI Large Cap Investor (FMIHX), iShares Core S&P Total US Stock Market ETF (ITOT), iShares Core S&P 500 ETF (IVV), iShares S&P 500 Index (WFSPX), Primecap Odyssey Stock (POSKX), Schwab Total Stock Market Index (SWTSX), Schwab S&P 500 Index (SWPPX), Schwab US Broad Market ETF (SCHB), Schwab US Large-Cap ETF (SCHX), SPDR Portfolio S&P 500 ETF (SPLG), SPRD Portfolio S&P 1500 Composite Stock Market ETF (SPTM), Vanguard Dividend Appreciation ETF (VIG), Vanguard Dividend Growth (VDIGX), Vanguard Tax-Managed Capital Appreciation (VTCIX), Vanguard Total Stock Market (VITPX)/(VTI), Vanguard S&P 500 (VINIX)/(VOO) and Vanguard Large Cap ETF (VV).
Foreign Large Blend: American Funds International Growth and Income (IGFFX), FMI International (FMIJX), iShares Core MSCI Total International Stock ETF (IXUS), Vanguard ESG International Stock ETF (VSGX), and Vanguard Total International Stock ETF (VXUS).
Intermediate Core Bond: Baird Aggregate Bond (BAGIX), Fidelity US Bond Index (FXNAX), iShares Core US Aggregate Bond ETF (AGG), SPDR Portfolio Aggregate Bond ETF SPAB, TCW Core Fixed Income (TGCFX), Vanguard Total Bond Market ETF (BND), and Western Asset Core Bond (WATFX).
Perhaps you feel your portfolio needs more than just three funds–maybe you’re in the accumulation stage and want additional exposure to smaller companies, or you’re retired and want a Treasury Inflation-Protected Securities bond fund. Or perhaps you’re fine with just three funds, but you want a bond fund that gives you some exposure to lower-quality bonds or to international debt. If that’s you, feel free to review our Top-Rated Mutual Funds and Top-Rated ETFs lists as a starting point.
Just remember: When it comes to investing, less can be more.
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