Money Magazine is recommending that those wishing to build their net worth over a long period of time simplify matters by putting all their eggs into seven baskets in the form of mutual funds.
1. Fidelity Spartan 500 Index (FSMKX). This fund’s total expense ratio is a minuscule 0.10%. It tracks the S&P 500 index.
2. Vanguard Total International Stock Index (VGTSX). “Nearly 60% of the world’s stock market value resides in companies outside our borders,” so you’ll want a piece of that action.
3. T. Rowe Price New Horizons (PRNHX). New Horizons is a small company stock fund. There are periods of time in which small company stocks have outperformed the market at large. This isn’t an index fund, though, so expect to pay an expense ratio of 0.79%, still low for managed funds.
4. Vanguard Value Index (VIVAX) . If you pay attention to value funds, your investments will return dividends. Literally. This fund currently offers a dividend yield of 2.94%.
5. Vanguard Total Bond Market Index (VBMFX). Got bonds? I don’t. But if your asset allocation calls for bonds, this fund beat the industry average by 14% over the past 10 years and its expense ratio is 0.20%.
6. Vanguard Inflation-Protected Securities Fund (VIPSX). First of all, official government inflation statistics underestimate the real increase in prices we see every year, partly because those who calculate the statistics assume Americans “trade down” to lower quality products when prices get high. Thus, inflation-protected securities are likely misguided. Money Magazine has nevertheless included them among the other suggestions.
7. Fidelity Cash Reserves (FDRXX). Cash reserves are good for when you spot a buying opportunity in the market and need flexibility and liquidity to jump. A money market fund like this is decent for at least part of your emergency fund. Personally, since I have some of my retirement accounts at Vanguard, I chose Money Magazine’s alternate, VMMXX. This Vanguard fund features an expense ratio of 0.24% compared to Fidelity’s 0.40%.
Probably more important than the specific funds is the overall asset allocation strategy. Investors spend a lot of time talking about investments, analyzing and choosing the best funds that will help us reach our goals, but asset allocation is just as important. If an investor ignores his allocations, her investments might not provide the results.
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The Only 7 Investments You Need [Money Magazine]
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I recently switched my money market account from the VMMXX fund to Vanguard’s tax-exempt money market (VMSXX) fund. The yields are 2.39% vs. 2.28% right now which means that after taxes, the second one is better. I even noticed at one point a couple weeks ago, that the yield on the tax-exempt fund was higher than the taxable one. Note: Vanguard defined the yield as “AVERAGE ANNUALIZED INCOME DIVIDEND OVER THE PAST 7 DAYS”
The only bad thing about the fidelity index funds is the minimum $10,000 initial investment. Since I’m just starting out my Roth IRA, that means you can’t invest in those funds for at least 2 years. (2 x $5k annual max. contribution)
Pretty solid portfolio and good choices. I would add a REIT fund, specifically the Vanguard REIT ETF, and a commodity ETF. Google Roger Gibson in the Journal of Financial Planning to see how those two asset classes benefit a portfolio.
Kirk is on to something. Consider this all-season/long-term moderate-risk portfolio:
30%—Vanguard Total Stock Market Index (VTSMX)
30%—Vanguard Total Bond Market Index (VBMFX)
20%—Vanguard Total International Index (VGTSX)
10%—Vanguard REIT Index (VGSIX)
10%—PIMCO Commodity Real Return Strategy D (PCRDX)
PCRDX gives exposure to the Dow Jones-AIG Commodity Index and TIPS—a double inflaton hedge. REITs are generally a good allocation choice because they move counter to the rest of the U.S. stock market. PCRDX moves counter to everything, and is has been an excellent performer over the last five years, although some commodities may be due for a rest.
The volatility of this portfolio is also relatively low.
“But if your asset allocation calls for bonds, this fund beat the industry average by 14% over the past 10 years and its expense ratio is 0.20%.”
If your asset allocation calls for bonds, why not just buy individual bonds? With bonds you know you’ll get your money back if you hold to maturity. Bonds aren’t like stocks, you don’t need to time the market unless you really want to speculate and play on bond value on the secondary market. If you just buy AAA bonds and hold to maturity there is virtually no risk. With bond funds you don’t have the option of holding to maturity as there is no maturity date, so you can gain value or loose value. The bond values on secondary market drop when interest rates go up. If you hold to maturity, you can simply buy individual AAA bonds when the rates are high and hold them to maturity. This way you can also control your risk-reward ratio yourself by buying bonds with different rating.