For many investors, evaluating their portfolio’s asset allocation can seem as appealing as a visit to the dentist.
But after a difficult year for US stocks, US bonds and global stocks in 2022, is balancing a must-do heading into 2023?
“If you’re in your 30s or 40s and think you have at least 20 to 25 years until retirement, you probably don’t need to change much in terms of the asset class exposure of your portfolio,” says the Morningstar director. Personal Finance and Retirement Planning, Christine Benz.
However, if you’re close to retirement — someone over 50 and 10 to 15 years away from retirement — Benz suggests taking a hard look at your asset mix, especially if it hasn’t been rebalanced for several years.
To Benz’s point, after struggling this year, the Morning Star US Market Index has risen about 10% annually for the past five years as of this writing. Meanwhile, the Bloomberg Barclays US Aggregate Bond Index is only in the black over the same period, and the MSCI EAFE Index is up more than 2 percent year over year over the same stretch. As such, investors who do not make a habit of rebalancing may find that their portfolios are still heavy on US stocks and light on bonds and international stocks.
Not sure what your target asset allocation should be? Use Benz model portfolios as a guide for savers and retirees.
If you already own a strong bond or global stock ETF or mutual fund, it may be more beneficial for you to invest some dollars in your portfolio into these existing holdings instead of creating new positions. But if you’re in the market for bonds or global stock ETFs or mutual funds, here are some ideas for further research.
The best bond ETFs and mutual funds for rebalancing
Those looking for a strong-core bond ETF or mutual fund should start their search with top-rated funds in the medium-core bond or medium-core-plus-bond solvency categories. Funds in both categories invest primarily in investment-grade U.S. fixed income issues, including government, corporate and securitized debt. They usually hold between 75% and 125% of the three-year average effective duration of the Morningstar Core Bond Index. The difference: Core-plus funds have more flexibility to hold non-core bonds like corporate high-yield, bank loans and emerging-market debt. Funds in both categories offer a lot of diversification within a single holding, and therefore don’t incur excessive interest rates or credit risk.
These ETFs and mutual funds are in the mid-core bond or mid-core-plus bond category and have at least one share that achieves the highest Morningstar Fund Analyst Gold rating as of December 1, 2022.
- Bond Fund of America ABNFX
- Baird Total Bond BAGIX
- Blackrock Total Return MAHQX
- Dodge & Cox Income DODIX
- Fidelity Total Bond FTBFX
- Fidelity Total Bond ETF FBND
- Fidelity US Bond Index FXNAX
- iShares Core US Aggregate Bond ETF AGG
- Loomis Sayles Core Plus Bond NERYX
- Pimco Total Return PTRAX
- Vanguard Total Bond Market ETF BND
- Vanguard Total Bond Market Index VBTIX
Of course, investors can expand their reach beyond these two categories of bond funds. If you’re investing in a taxable account and you’re in a higher tax bracket, for example, a municipal bond fund might be better for you. Or if you’re in retirement or on the brink, you may be in the market for short-term bond funds, or funds that invest in inflation-protected securities.
Find more top-rated bond ETFs and mutual funds from different categories in Best Bond Funds.
The best global stock ETFs and mutual funds for rebalancing
When it comes to global fares, we recommend using a well-diversified, large-cap focused fund as a core. You will find such funds in the foreign large-cap hybrid category. Foreign capital is concentrated in established markets in Europe, particularly France, Germany, Switzerland, the Netherlands, Spain, Italy and the United Kingdom. They often hold significant positions in Asia as well. Although they do trade in emerging market stocks, they usually have around 15% of their assets exposed to those markets. The funds in the foreign large-cap mixed category invest in stocks with both growth and value characteristics.
These ETFs and mutual funds are all in the Foreign Large Blend category and have at least one share that achieves the highest Morningstar Fund Analyst Gold rating as of December 1, 2022.
- American funds international growth and income IGFFX
- DFA International Core Equity DFIEX
- Dimensional International Core Equity Market ETF DFAI
- FMI International FMIJX
- iShares Core MSCI Total International Stock ETF IXUS
- MFS International Equity MIEIX
- Vanguard FTSE All World Ex-US ETF VEU
- Vanguard FTSE All World Former US Index VFWAX
- Vanguard Total International Stock ETF VXUS
- Vanguard Total Global Stock Index VTSNX
Here too, investors can broaden their search beyond this single global stock category if they choose. For example, those looking to manage their exposure to growth and value stocks will find many top-rated funds in the foreign large growth and large value categories. There are also highly rated global equity funds that focus exclusively on mid- and small-cap companies or emerging market stocks.
Find more top-rated global stock ETFs and mutual funds from different categories in Best Global Stock Funds.
Should you rebalance your portfolio in 2023?
Even if your broad asset mix is balanced, you may find that your sub-asset segments may need some work. Perhaps your allocation to small-cap stocks is lower than you’d like. Or you inadvertently choose growth patterns over price patterns – or vice versa. Not sure if your portfolio’s asset allocation is out of whack? Morningstar Investor members can use our portfolio tool to find out.
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