10 Questions: Is Your Fund Family the Enemy?

You're discussing large-cap stocks here, correct?

Yes, for large-cap. But the trouble for pensions is they can't go the Fama-French route because they're too big. Individuals can invest in small-cap stocks and emerging market stocks if they want to take that gamble and get higher returns. But pension plans are too big. Small investors might be able to get 5% real returns 30 years out if they diversify.

9. How can investors build a diversified portfolio that will put them in good stead for the next decade or so?

Overall, the person should decide four steps:

Number one: What are your risk-tolerance and return needs? 60 to 40 is a good place to start. Three years ago, people didn't know their risk tolerance. Now they do. (Laughs.) The one real advantage of a horrible bear market is learning this lesson. For a young person, this is a great experience you learned and you can buy all these stocks cheaper than you did three years ago.

Number two: You have to decide your domestic/foreign split. I think 75% domestic-25% foreign is reasonable.

Number three: Decide whether you want a value bias or not? Remember, you get higher rates of return with value over the long haul, but you also get higher tracking errors. You'll have longer periods of time, like the late-90s, when your Janus-investing, beer-swilling neighbor is going to be trouncing you.

That's an interesting connection to make -- beer and Janus.

(Laughs.) It's a more general way of saying the average Janus investor isn't as informed as the average Vanguard investor. I think it's safe to make that assumption.

Number four: What goes into sheltered and what goes into nonsheltered investments? The new tax law just reinforces why tax-efficient assets like the S&P 500 or Vanguard's foreign stock index fund should all go in the taxable part of your portfolio. The sheltered part gets things that should be sheltered from taxes: REITs, junk bonds and most of your bonds, really.

10. What's the one most important thing investors need to learn -- the one thing you want to impart for folks who might not go out and read your book?

Costs matter. Index matters.