The ultimate mutual fund portfolio
Retirement investing the easy way: diversified choices for long-term growth.
(FORTUNE Magazine) - For investors who prefer to keep things simple, just a handful of mutual funds or exchange-traded funds (ETFs) can help grow a handsome nest egg. This year, as a year ago, we've selected solid choices in several categories. To anchor our lineup, we chose a total- market fund with holdings that span the broad range of U.S. stocks, from large to small. We blended in more specialized large-cap, small-cap, and international picks to boost returns. For additional diversification, we included an alternative-asset fund.
The portfolio we assembled for retirement investing last year worked well: The stock mutual funds we recommended averaged total returns of nearly 16% from June 24, 2005, to June 2 of this year, vs. 10% for the S&P 500. The bond fund, meanwhile, held back by rising interest rates, returned 1.2%, and the all-asset fund gained 2.3%.
Even with those fine results, we've made a couple of changes to our roster this year. T. Rowe Price Capital Appreciation will see manager Stephen Boesel step aside June 30, so we've replaced it on our list while the new managers establish their own track record. For small caps, Third Avenue Small-Cap Value has closed to new investors, forcing us to find an alternative. For bond funds, we're detailing a wider range of choices this year.
As we did last year, we've listed an ETF alternative with each fund. Which should you choose? If you're looking to plow a sizable lump sum into the market, consider the ETFs, which carry very low expenses and are extremely tax efficient. But if you plan to make periodic purchases, mutual funds may help you avoid the costly commissions that can add up with ETFs, which trade like stocks.
At the heart of our mutual fund portfolio is Vanguard Total Stock Market Index (Charts). The more than 3,700 equities in this fund cover every sector, from consumer goods to tech to utilities, and run the gamut from small cap to supersized. That broad mix makes this a great core holding for any investor --and has helped edge out the S&P 500 by 1.4 percentage points a year over the past five years. An expense ratio of just 0.19% means gains won't be drained away by management, though for those in a position to invest $10,000 or more, Fidelity's Spartan Total Market Index (Charts) carries even lower expenses. As an ETF alternative, Vanguard's Total Stock Market VIPERs (Charts) also provides broad stock market exposure on the cheap, with a rock-bottom expense ratio of 0.07%.
Big blue chips have lagged smaller stocks in recent years, but as a result they present some appealing values these days. The $4 billion Dreyfus Appreciation fund (Charts) is an excellent way to capitalize on that potential. The management team from Fayez Sarofim & Co. takes a patient approach to buying the best and biggest of blue chips, searching for sectors that can grow in coming years. Once a name is added to the fund, it stays for a long time; turnover, at less than 10% a year, is exceedingly low. For an ETF play on mega-cap names, the iShares S&P Global 100 Index (IOO) offers low-cost exposure to the largest of multinationals from the U.S., Britain, and elsewhere.
Small caps have been market stars in recent years, and while they've cooled a bit lately, they can still boost your returns long term. Esteemed manager Chuck Royce has navigated a wide range of market environments--he's been at the helm of Pennsylvania Mutual (Charts) since 1973, a longer tenure than any other small-cap manager. Three other managers now help steer this low-cost portfolio, which has grown to $3.5 billion and ranges from micro-caps to mid-caps. For ETF buyers, the Vanguard Small Cap Value VIPERS (VBR) offers a basket of 950 companies at an expense ratio of just 0.12%.
International stocks have been hot as well, and few managers have matched the performance of the team at Dodge & Cox International Stock (Charts) . The fund has racked up gains of 33% a year over the past three years, placing it in the top 1% of its category. Those outsized returns have led investors to pour in cash, but the team here has proved its ability to handle those inflows--and its willingness to close funds when necessary. Another way to buy into Europe and Asia is the iShares MSCI EAFE Index fund (EFA), which holds more than 800 stocks.
Finally, "alternative assets" like commodities and real estate are great ways to diversify your portfolio. Both have had tremendous runs recently, which makes them vulnerable to setbacks; real estate stocks have already taken a hit and may have further to fall. But it still makes sense to own these diversifiers, particularly if you don't go overboard. One solution: a fund like Pimco All Asset (PASDX), which holds a broad range of alternative assets, including commodities, international bonds, Treasury inflation-protected securities, and real estate.
ETF marketers know where the action is, so they continue to introduce funds in this hot category, including options such as the Deutsche Bank Commodity Index Tracking fund (DBC), which invests in six commodities: aluminum, corn, gold, heating oil, light sweet crude oil, and wheat. Our concern about commodities being overpriced applies here too, but DBC is an option worth considering for a small portion of your portfolio.
Solid selection: Ten choices for a profitable mix
Total stock market
Vanguard Total Stock Market Index VTSMX
Broad market exposure and low expenses make this a top-notch anchor for any portfolio. Small- and mid-cap names account for about a quarter of the more than 3,700 stocks, providing an edge over the S&P 500 when those smaller stocks are in favor.
Vanguard's Total Stock Market VIPERs VTI
A cheap, efficient way to get nearly every public company in one basket.
Dreyfus Appreciation DGAGX
This fund buys only the bluest of blue chips. Stocks in the portfolio have an average market cap of $107 billion and tend to stay in the fund for more than ten years, boosting tax efficiency.
iShares S&P Global 100 Index (IOO)
Tracks an index of multinationals with market caps of $5 billion or more.
Pennsylvania Mutual PENNX
The five-year returns racked up by manager Chuck Royce and his colleagues place this fund in the top 16% of its category. The fund now has some 40% of its hefty $3.5 billion in assets invested in mid-caps.
Vanguard Small Cap Value VIPERS VBR
Its bargain-basement expense ratio makes this the cheapest of small-cap value ETFs.
Dodge & Cox International Stock DODFX
Stellar returns in a competitive category make this an outstanding choice. Modest expenses, low turnover, and a disciplined team approach have investors flocking to this $18.4 billion fund.
iShares MSCI EAFE Index fund EFA
The fund holds mostly large-cap names such as BP, HSBC Holdings, and Toyota Motor.
Pimco All Asset PASDX
Asset-class diversification doesn't get much easier than this distinctive fund, which buys commodities, bonds, real estate, and even stocks. Manager Robert Arnott deftly changes the mix to maximize returns.
Deutsche Bank Commodity Index Tracking fund DBC
This new entry is the first ETF to track a commodity index.
Data as of June 7.