Every year around this time, many of us resolve to adopt a new good habit (or two) for the coming year. Maybe he’s exercising more or eating less. Or reconnecting with family, or connecting with electronics.
Many investors can use leverage to diversify their portfolios. why?
“Anything in your financial life—like clutter on your desktop—can distract you from the more important tasks at hand,” says Kristin Benz, director of personal finance at Morningstar. “If your portfolio has too many moving parts, you may not be in a hurry to evaluate and maintain it.”
Plus, if something were to happen to you, a complex portfolio could make life difficult for loved ones left behind. Take the time to simplify your portfolio so you can transfer if needed.
How to simplify the investment portfolio
Here are three strategies investors can use to build simple portfolios.
1) Swap your actively managed funds for index investments.
2) Favor a broad range of all-market equity funds over a style-specific collection of equity funds.
3) Delegate some/all of your asset allocation to a target-date or allocation fund.
Here’s a little more research on each strategy and some exchange-traded funds and mutual funds.
Strategy 1: Swap your actively managed funds for index investments.
Index funds are passive investments, meaning they have no key person risk and no strategy surprises — and therefore require almost as little oversight as their actively managed counterparts. Some people may say that you cannot beat the market if you are indexing, this is certainly true. But is shooting to beat the market really worth the extra attention? For most investors, probably not.
There are top-rated index funds in all major investment categories, whether you’re looking for growth or value stocks or both, large or small companies, foreign stocks and bonds. Find a complete list of top-rated passive mutual funds and ETFs in Best Index Funds.
Among major domestic large-cap ETFs and mutual funds, top index fund picks include Schwab US Broad Market ETF SCHB, iShares Core S&P Total US Stock Market ETF ITOT and Vanguard Total Stock Market Index VITSX VTI.
Among international stock funds, we like the gold-rated Vanguard Total International Stock Index VTIAX VXUS and the iShares Core MSCI Total International Stock ETF IXUS, among others.
And finally, some of our picks include the Vanguard Total Bond Market Index VBTIX BND and the iShares Core Total USD Bond Market ETF IUSB.
Strategy 2: Favor a broad range of all-market equity funds over a style-specific collection of equity products.
Experts have drummed into our heads the value of intra-asset-class diversification. After all, sometimes growth stocks lead the market, and other times value wins. As the experts say, make sure you are exposed to both styles. Also, small caps have longer performance times than large caps, so be sure to own both. And international stocks can zig when the US market zags; Don’t forget about emerging-market stocks!
Those of us who have followed that advice may have invested in large and small funds, individual value and growth funds, and perhaps a number of global funds.
Do we need all these building blocks to have a well-diversified investment portfolio, or can one or two broad funds do the job instead?
Of course, a wide range of index funds—many of the ones mentioned earlier—can provide enough diversification. For example, combining the Vanguard Total Stock Market with the Vanguard Total International Index gives you greater exposure to the global stock market. Only two funds, but lots of diversification—and at a low cost, to boot.
But actively managed funds can fit the bill. Find a list of top-rated ETFs and mutual funds in the US large-cap Morningstar category in the Best Core Stock Funds. Among international stock funds, some active, broad-based options include gold-rated US funds International Growth and Income IGFFX and FMI International FMIJX. Find top international stock fund ideas in Best International Stock Funds.
To properly diversify equity positions, investors can choose funds from Morningstar’s global stock categories. Funds in this group focus on US and international stocks, thereby providing global diversification in a single investment. Some top-rated global stock funds include Dodge & Cox International Stock DODFX, T. Rowe Price Global Growth Stock RPGEX, iShares MSCI ACWI ETF ACWI and Vanguard Total World Stock Index VTWIX VT.
Strategy 3: Delegate some/all of your assets to a target date or mutual fund.
The previous two propositions assumed that investors wanted to control stock/bond mixtures. But for those who prefer to step away from being hands-on with their asset mix, allocation or target-date funds may be of interest.
Both allocation and target-date funds combine stocks and bonds in a single portfolio, providing asset-class diversification within a single fund and thereby reducing the need for multiple controls.
Mutual funds typically invest in a target stock/bond mix. And those stock/bond mixes can be conservative (15% to 30% in stocks and the rest in bonds), aggressive (holds more stocks than bonds), and moderate (their stock/bond allocations are somewhere in between). Some top allocation funds include Fidelity Multi-Asset Index FFNOX, T. Rowe Price Balanced RPBAX and Vanguard Wellesley Income VWINX.
Morningstar Investor members can find a list of top-rated allocation ETFs and mutual funds here.
Unlike mutual funds, target date funds do not invest back into a target stock/bond mix. Instead, these funds offer an age-appropriate asset mix and generally make that mix more conservative over time, increasing their exposure to bonds and reducing their equity exposure. The idea is to choose a target date fund that is close to the year you plan to retire. American Fund Target Retirement Series, BlackRock Life Path Index Target-Date Fund Series, Pimco Real Path Hybrid Series and T. The Rowe Value Pension Series all achieve the gold standard for their cheapest stock units.
For more on target-date funds, read Best Target-date Funds.
More on simplifying your investment portfolio in 2023
Of course, be sure to simplify in a tax-modern way. For some, this may mean limiting leverage to tax-deferred accounts. Or it may require only modest changes in taxable accounts, allowing you to carefully offset gains against losses.
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