Six Great Core Funds, Six for Diversifying
Is your portfolio in need of some shaping up?
by Sue Stevens, CFA, CFP, CPA | 12-08-05 | 06:00 AM | E-mail Article | Print Article | Permissions/Reprints
Today we'll take a look at which funds can do the heavy lifting in your portfolio (core funds) and which funds deserve a look for their diversifying features. You can compare these choices with your own portfolio and see if you might want to do a little rebalancing.
Core Funds
When I start building a portfolio, I like to begin with some funds that can stand the test of time. One of the most important features I look for is consistency: How have these funds performed over good and bad markets? I don't necessarily look for funds rated 5 stars, but I do want these funds to perform in the top fourth, or quartile, of their respective categories for at least the last several years. If I can find a 5-star fund that meets my consistency criteria, all the better.
Vanguard Total Stock Market Index VTSMX
If you want to have a portion of your portfolio in the stock market, buying this total index fund can be a smart way to implement your strategy. The cost is minimal, and you'll never underperform the market (other than by the small cost of the fund, taxes, or transaction costs, if any). Of course, if the market doesn't do well, neither will you. For those of you looking to shave off a little more cost, you might try Vanguard Total Stock Market VIPERs VTI, an exchange-traded fund that tracks the same stocks as Vanguard's Total Stock Market mutual fund.
T. Rowe Price Personal Strategy Balanced TRPBX
Another good way to start building your portfolio is with a balanced fund. This fund allocates about 65% of its assets to stocks and the rest to cash and bonds. It has consistently beaten its category benchmark for the past five years. When you buy this fund, you're buying lower volatility at a reasonable cost. For as little as $1,000 in an IRA account ($2,500 in a regular taxable account), you'll have instant diversification.
Sound Shore SSHFX
You have to admire the consistency we've seen over the years from this tax-efficient fund. Fees are reasonable and the management is stable. It has a $10,000 minimum initial investment ($2,000 for an IRA). Although it falls in the large-value category, it includes about 26% in mid-cap stocks. Yield is low at 0.22%.
American Funds Growth Fund of America AGTHX or GFAFX
I've always admired the American Funds family, and when I discovered you can buy these funds without a load ("F" share classes are available through approved advisors), I liked them even more. Growth Fund of America gives you good exposure to the large-cap growth style of investing.
Vanguard Total Bond Market Index VBMFX
Interest rates have been slowly coming up and may level off sometime in 2006. As we see rates stablize, you may want to move into intermediate-bond funds to capture the higher yields. (Shorter-duration funds may offer greater interest-rate protection, but the yields will be lower than intermediate-duration funds.) The Vanguard family offers outstanding bond funds at very low costs.
Dodge & Cox International Stock DODFX
In building a core portfolio, you should hold at least a portion in an international fund. This one provides broad exposure to multiple foreign markets and keeps costs under control. The team running this portfolio won Morningstar's International-Stock Manager of the Year honors in 2004.
Diversifying Funds
Once you have a solid core in place, you can add some exposure to other types of asset classes or market strategies that may give your overall portfolio broader diversification. These funds should be strong in their own right, but more importantly, they should offer something different than the core funds do to deserve a spot in your portfolio.
PIMCO All Asset PASDX
If you're looking for a balanced fund with a twist, check out PIMCO All Asset. (The "D" share class is no-load if you're working with a fee-only advisor.) The twist is that the fund tries to beat inflation by at least 5% using investments such as TIPS (Treasury Inflation-Protected Securities), real estate, and/or commodities. In some ways, this fund acts like a hedge fund without leverage and without the excess cost.
PIMCO Commodity Real Return PCRAX or PCRDX
This fund offers another way of adding diversification to your overall portfolio by including broad-based exposure to the commodities market. The manager uses leverage to gain exposure to the Dow Jones-AIG Commodity Index while using TIPS as collateral for the derivatives. It's not for everyone, but it does offer diversification possibilities. (My preference is for the "D" share class, which is no-load.)
Third Avenue Small-Cap Value TASCX
Third Avenue has one of the best funds in any small-cap category. Its manager's buy-and-hold philosophy means you'll probably get a higher-than-average dash of mid-caps. Note, too, that the fund has a significant stake in cash currently and is not afraid to venture abroad.
Vanguard Inflation-Protected Securities VIPSX
TIPS are no longer a secret. Lots of industry insiders are choosing to put a significant portion of their portfolios into these securities (in fact, for some people this could be a core holding). You can buy individual TIPS, exchange-traded TIPS (for example, iShares Lehman TIPS Bond TIP), or a fund such as Vanguard Inflation-Protected Securities. Because TIPS have a portion of their total return tied to inflation rates, they make a terrific diversification vehicle should we run into higher inflation going forward. Even in the absence of much inflation, these bonds have proved to be beneficial.
Fairholme FAIRX
If you want to own Warren Buffet's Berkshire Hathaway BRK.B without paying the astronomical stock price, you can do so by buying Fairholme Fund. Berkshire Hathaway is its top holding at 15% of net assets. Like Third Avenue Small-Cap, this fund holds a significant cash stake and about 18% in foreign stocks. Unlike Third Avenue Small-Cap, this fund focuses on mid-cap stocks and is more concentrated in its holdings.
Loomis Sayles Bond LSBRX
Dan Fuss has been well respected in the bond world for many years. Although his choices are more eclectic than most, his performance record holds up very well. This fund is an aggressive bond fund, and that makes it more suitable for a supporting position in your portfolio. Fees are on the high side for a bond fund, and you'll also want to watch out for that 2% redemption fee on shares held less than 60 days.
