Sometimes I look at the unruly gaggle of funds I own and wish I could hit the reset button. So let's do it.
Like most people, I started out collecting funds I liked one by one, often picking from the menu at fund shops where I worked. Each seemed good enough at the time, and many are good funds. But building a portfolio is like cooking a meal: Good individual ingredients aren't always a good recipe. Picture juicy prime rib drenched in hot fudge, topped with ripe peach slices, all wrapped in a fresh, warm, flour tortilla, and you know what I'm getting at.
I know I'm not the only repentant fund collector out there because I get emails from fellow sinners all the time. Some, for instance, thought they were diversified with several Janus funds and ended up with a tech-heavy portfolio strictly focused on big-cap growth stocks. As a columnist for TheStreet.com, I'm not allowed to give anyone specific financial advice. But, as a useful exercise, Tuesday I sat down and roughed out a diversified, long-term stock fund portfolio I'd build today if given a clean slate. Here it is.
|The Junkie Portfolio |
Whether you're starting over or starting out, here's my recommendation for asset allocation, and the funds that are among the best of their breeds
|35% ||Core U.S. Stock || (VTSMX)Vanguard Total U.S. Stock Market |
|15 ||Core Foreign Stock || (VWIGX)Vanguard International Growth |
|10 ||Growth || (GABGX)Gabelli Growth |
|5 ||Growth || (FIDYX)Invesco Dynamics |
|10 ||Value || (LMVTX)Legg Mason Value Trust |
|5 ||Value || (OAKMX)Oakmark |
|10 ||Small-Cap || (MGSEX)Managers Special Equity |
|10 ||Sector || (DGTNX)Dresdner RCM Technology |
| (FSPHX)Fidelity Select Healthcare |
| (FSFSX)Invesco Financial Services |
First, a few parameters. The time horizon for this portfolio is 10 to 15 years. This is just the stock portion of the portfolio, excluding bonds or bond funds. Also, I'm assuming this is a taxable account and focused primarily on no-load
funds, because I was doing this with my own counsel.
The idea here is to blend solid core funds that give you cheap access to the broad markets with a group of funds in which gifted stock pickers focus on different parts of the market. The core stock funds ensure that the portfolio won't stray too far from marketlike weightings, but the growth, value, small-cap and sector-fund managers build in the chance to beat the market over time.
If we X-ray this portfolio, we find some good traits. It doesn't ignore any part of the market, but its overweightings in the tech and financial sectors give it a chance to benefit from markets that favor growth or value stocks, respectively. Its 0.72% average expense ratio is far below the average U.S. stock fund's 1.23% -- mostly thanks to the core Vanguard
funds. Each of these funds has solid tax-efficiency ratings vs. their peers. And in last year's bloodbath, the portfolio would've lost only 4.3%, compared with the S&P 500's
9.1% tumble, according to Morningstar
|Under the Hood |
The Junkie Portfolio resembles the S&P 500 weighting somewhat, but overweights sectors such as tech and financials and lightens up on consumer staples and energy
|Sector ||Junkie Portfolio Weighting ||S&P 500 Weighting |
|Technology ||25.6% ||21.2% |
|Financials ||19.3 ||17.5 |
|Services ||16.8 ||11.1 |
|Health ||14 ||13.9 |
|Industrial Cyclicals ||8.4 ||11.6 |
|Retail ||5 ||6 |
|Consumer Staples ||3.1 ||6.7 |
|Energy ||3 ||7.3 |
|Consumer Durables ||2.9 ||1.6 |
|Utilities ||2 ||3 |
| ||Portfolio ||Avg. U.S. Stock fund |
|Avg. Expense Ratio ||0.72% ||1.23% |
|Best/Worst Year |
| ||Portfolio ||S&P 500 |
|Worst Year ||2000: -4.3% ||2000: -9.1% |
|Best Year ||Aug. 1996 - Aug. 1997: 47.1% ||Aug. 1996 - Aug. 1997: 52% |
|Source: Morningstar. Data through Dec. 31. |
I checked with a couple of pros, and they generally like this blend of funds, too.
"I think this looks pretty good," says Morningstar senior fund analyst Scott Cooley. "It's well-diversified by sector and fairly close to the broad market. These are funds run by good managers, so you're letting stock selection drive these returns."
"You're overweighted in financials and technology, which is fine. You're staying pretty close to the benchmark and the expenses look good. We've loaded up on the (OAKMX)
Oakmark fund too," says Ron Roge, a financial planner based in Bohemia, N.Y.
In terms of criticisms, Cooley says expenses could be even lower and Roge warns that some investors might be tempted to actively trade the sector funds, rather than meekly rebalance them at the end of each year with new investments.
Beyond its diversity and low expenses -- and in part because of them -- this portfolio would've beaten the S&P 500 over the past one-, three- and five-year periods, according to Morningstar. Over the past five years, its 19.5% annualized return would've beaten the S&P 500 by nearly three percentage points.
We can't go back further than that because some of the funds don't have a 10-year record.
|Junkie Performance |
|Source: Morningstar. Data through Dec. 31, 2000. |
You might wonder if I cheated by simply picking hot funds to goose returns. The answer is no. In fact, many of these choices dragged returns a bit. For instance, Bill Nygren runs the Oakmark and the more concentrated (OAKLX)
Oakmark Select funds. The latter has a much better track record, but I picked the former because he took the reins last year and the fund's losses under the previous manager will give the fund greater tax-efficiency in coming years.
Obviously, when you're picking 10 funds from thousands, there are plenty of things you could do differently. Different choices might suit you better than they do me.
In picking a core U.S. stock fund, some might prefer the mainly large-cap (VFINX)
Vanguard 500 Index fund, but I went for the (VTSMX)
Vanguard Total Stock Market Index fund, which tracks the broader Wilshire 5000 Index
. We've highlighted other solid core U.S. stock funds like the no-load (TRBCX)
T. Rowe Price Blue Chip Growth fund in the past.
I chose (VWIGX)
Vanguard International Growth over other foreign funds because I like the fund's low 0.53% expense ratio and long-time manager Richard Foulkes' knack for posting above-average returns with below-average volatility. A recent Big Screen
turned up other solid foreign funds
you might consider.
In picking growth funds I chose one fund run by a solid manager who holds mostly large-cap stocks, Howard Ward's (GABGX)
Gabelli Growth fund, and another steady fund whose managers hold mostly mid-cap stocks, Tim Miller and Thomas Wald's (FIDYX)
Invesco Dynamics fund. I did the same in picking value funds, choosing the mostly large-cap (LMVTX)
Legg Mason Value Trust fund, run by Bill Miller, and the mainly mid-cap Oakmark fund, where Bill Nygren holds the reins.
These managers know what they're doing. They have distinct disciplines, they've consistently beaten their peers and their strategies mesh well. Check out these 10 Questions interviews to hear from these folks directly:
You can shop for your own faves using our Screens of the
For my small-cap fund, I chose the (MGSEX)
Managers Special Equity fund for the same reasons I own it in my real portfolio: access to a host of distinct, talented managers who have routinely beaten their peers.
The fund spreads its assets among four different fund shops that focus on a different part of the small-fry market, including small-cap growth, small-cap value and micro-caps. Long story short, I think this is a great catchall fund for an investor looking for a small-cap fund whose manager isn't overwhelmed with assets and that isn't closed to new investors. To see what else is out there, check out these Big Screens of the
When it came to picking sector funds, I was in a pickle. The three I picked are all well-run, but none is my first choice. I would've picked tech guru Kevin Landis' (TVFQX)
Firsthand Technology Value fund and Ed Owens' (VGHCX)
Vanguard Health Care fund, but the former has a $10,000 minimum investment and the latter's is a whopping $25,000. Because I want these funds to be about 3% each of the portfolio, I'd need a pretty big pot of money to buy these funds without breaking my plans.
Because I didn't want a strictly biotech fund, I had a hard time finding a no-load health care fund I liked. I finally chose the (FSPHX)
Fidelity Select Healthcare fund, which charges a maximum 3% load or sales charge.
For the financial sector fund, I chose the (FIDYX)
Invesco Financial Services fund -- a solid option -- over my first choice, the broker-sold (FIDAX)
John Hancock Financial Services fund, where guru Jim Schmidt has made some savvy moves. I own the fund from my days working at that firm.
Well, there you have it. Whether you like this lineup or hate it, making your own lineup might help you build around that rag-tag bunch of funds you own today.