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Extra
6 steps to a perfect portfolio
We've given you 25 great stock funds -- but each is not for everybody. Here's how to put together the right combination for your goals.
By Steven T. Goldberg, Kiplinger
Picking great funds is an important element of a successful investment plan. But its not everything. Assembling a reliable portfolio -- a collection of funds that work well together -- is just as crucial to building wealth. (Our model portfolios are designed for investors with different goals and varying time horizons.) Here are six things to consider when building a portfolio:
Time is everything. If youre investing for retirement ten or 20 years in the future, youll want to invest much more aggressively than if youre saving for your 16-year-old daughters college education. The more time you have before youll need your money, the more you should put in to stock funds. See step five.
Diversify, diversify, diversify. Different kinds of investments and different sectors of the markets move in and out of favor without much rhyme or reason--but with devastating consequences for investors who have too much of their money in the wrong area at the wrong time. By owning funds that invest in different kinds of stocks, youll minimize your portfolios volatility without hurting your returns. Holding bond funds will also moderate a portfolios zigs and zags.
Invest abroad. Sure, the U.S. is the engine that drives the worlds economy, but why ignore the rest of the globe? Owning a foreign-stock fund can be particularly profitable when the dollar declines in value, as it has for most of the past two years (money invested in foreign currencies translates into more dollars when the greenback weakens).
Know thyself. Did you break into a sweat and sell stocks or stock funds during the 2000-02 bear market -- after your investments had already taken a licking? If so, perhaps you had more money in stocks than was suitable for your temperament. That brutal bear market provided an invaluable test of how much heat you can withstand during a market conflagration. You can expect a 20% to 30% stock-market decline about once every five years. If you cant handle a decline of that magnitude, then you shouldnt overdo your stock allotment.
Dont fret the short term. The stock markets short-term moves can be frightening. But stocks deliver the highest returns of any investment category over long periods of time. On average, U.S. stocks have returned 10% per year compounded since 1926, while bonds have returned only 5%. Over five-year periods, stocks have beaten bonds 78% of the time -- and have lost money in only 10% of those stretches. Over longer periods, the odds favor stocks even more.
Stock up for (and in) retirement. If you retire at age 65, odds are youll live another 20 or more years. Your money will need to last that long, too. Thats why we recommend keeping more of your money in stock funds as you approach retirement than when you near other goals, such as buying a house. Even in retirement, we suggest that you keep 50% to 60% of your money in stock funds. True, such a strategy will cut down on your interest income. But if you need money to live on, just sell some of your stock funds.
Portfolio 1: When your goal is long-term
With their minds on college applications or proms, high school seniors arent necessarily the most diligent of students. But Jonathan Dick was paying attention to his senior-year economics teacher, and that teacher is a big reason the 28-year-old computer programmer from Mobile, Ala., has accumulated nearly $70,000, almost all of it in mutual funds. "He said that schools spend all this time teaching students skills that help them earn money," Dick recalls, "but they never teach you how to invest your money." So the teacher spent the last third of the year teaching his students about funds.
This portfolio is well-suited for Dick and other investors who are six years or more from retirement or at least 10 years away from another goal, such as a childs first college-tuition bill. The portfolio is 100% in stock funds, some of which, standing alone, are volatile. The overall package should smooth out some of that bumpiness -- and prove rewarding over time. We assume, moreover, that you have cash set aside or a line of credit to see you through a financial crunch.
How to get started. To copy this portfolio in these proportions would require $20,000 in a regular account (or $10,000 in a retirement account). Or accumulate the funds in this order: Oakmark, Masters, Legg Mason, Century, TCW and, finally, Third Avenue.
| Long-term portfolio | | Portion | Fund | | 15% | TCW Galileo Select Equities I (TGCEX) | | 20% | Oakmark Fund (OAKMX) | | 20% | Legg Mason Opportunity Primary (LMOPX) | | 25% | Masters Select International (MSILX) | | 10% | Century Small Cap Select (CSMVX) | | 10% | Third Avenue Real Estate Value (TAREX) |
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Portfolio 2: For a medium-term goal
Julia Hugee-Pedersen stays plenty busy running Als Cafe & Creamery, a restaurant in Elgin, Ill. Despite 12-hour days, she still manages to spend time with her children (Julian, 17, a high school junior who lives at home, and Brittany, 24, and Janek, 22, who live nearby) and to run nearly every morning. "I have a lot of energy," says Julia, 54. Dont look for her to slow down when she sells her restaurant and retires in five years. She plans to work part time in her former field, designing womens clothing, and to spend more time volunteering as a court advocate for neglected and abused children.
When, like Hugee-Pedersen, youre within five years of retirement or six to nine years from any other goal, you have to steer a middle course. You dont want to invest too aggressively and risk big losses, but you still need your money to grow. This portfolio trims risk by adding bond funds to the mix. Note that the real estate fund in this and the short-term portfolio focuses on operating companies, not real estate investment trusts.
How to get started. To copy this portfolio in these proportions would require $100,000 in a regular account (or $30,000 in a retirement account). Or accumulate the funds in this order: Oakmark, Masters, Century, Harbor, Loomis Sayles, Marsico, Third Avenue and, finally, Aegis. You can cut the portfolio minimum to $25,000 by substituting Olstein Financial Alert for Aegis.
| Conservative portfolio | | Portion | Fund | | 15% | Marsico Growth (MGRIX) | | 20% | Oakmark Fund (OAKMX) | | 20% | Masters Select International (MSILX) | | 5% | Century Small Cap Select (CSMVX) | | 10% | Aegis Value (AVALX) | | 10% | Third Avenue Real Estate Value (TAREX) | | 10% | Loomis Sayles Bond (LSBRX) | | 10% | Harbor Bond (HABDX)* |
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*In a taxable account, substitute Vanguard Intermediate-Term Tax-Exempt (VWITX).
Portfolio 3: When youve already retired
Peter Kent and his wife, Maureen, are planning a big move -- literally. When Maureen, 50, retires at the end of the year as a claims technician for an insurance company, the couple will move from the Indianapolis suburbs to the coast of South Carolina. "Weve vacationed there every year for the past 10 years, and we like the lifestyle," says Peter, 58, who retired two years ago from the underwriting department of another insurance company. "The golfing is good."
This portfolio is ideal for early retirees, such as the Kents, as well as other investors who are three to five years away from needing their money for other goals. Retirees in their mid- to late 60s should consider putting some, or all, of the bond portion of their investments into immediate fixed annuities, which pay guaranteed monthly checks for the rest of the policyholders life. Other investors should gradually begin to sell their stock funds first and their bond funds later, when they are within three years of their goals.
How to get started. To copy this portfolio in these proportions would require $100,000 in a regular account (or $30,000 in a retirement account). Or accumulate the funds in this order: Selected American Shares, Fidelity, Masters, Third Avenue, Harbor, T. Rowe Price and, finally, Aegis. You can cut the portfolio minimum to $50,000 ($10,000 for an IRA) by replacing Aegis with Olstein Financial Alert.
| Income portfolio | | Portion | Fund | | 15% | T. Rowe Price Growth Stock (PRGFX) | | 15% | Selected American Shares (SLASX) | | 10% | Masters Select International (MSILX) | | 10% | Aegis Value (AVALX) | | 10% | Third Avenue Real Estate Value (TAREX) | | 10% | Fidelity Floating Rate High Income (FFRHX) | | 30% | Harbor Bond (HABDX) |
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Return to "The 25 best mutual funds"
2004, The Kiplinger Washington Editors, Inc.
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