The ultimate mutual fund portfolio
Retirement investing the easy way: diversified choices for long-term growth.
(FORTUNE Magazine) - For investors who prefer to keep things simple, just a handful of mutual funds or exchange-traded funds (ETFs) can help grow a handsome nest egg.
This year, as a year ago, we've selected solid choices in several categories. To anchor our lineup, we chose a total-market fund with holdings that span the broad range of U.S. stocks, from large to small. We blended in more specialized large-cap, small-cap, and international picks to boost returns. For additional diversification, we included an alternative-asset fund.
The portfolio we assembled for retirement investing last year worked well: The stock mutual funds we recommended averaged total returns of nearly 16 percent from June 24, 2005, to June 2 of this year, vs. 10 percent for the S&P 500. The bond fund, meanwhile, held back by rising interest rates, returned 1.2 percent, and the all-asset fund gained 2.3 percent.
Even with those fine results, we've made a couple of changes to our roster this year. T. Rowe Price Capital Appreciation (Charts) will see manager Stephen Boesel step aside June 30, so we've replaced it on our list while the new managers establish their own track record.
As we did last year, we've listed an ETF alternative with each fund. Which should you choose? If you're looking to plow a sizable lump sum into the market, consider the ETFs, which carry very low expenses and are extremely tax efficient.
But if you plan to make periodic purchases, mutual funds may help you avoid the costly commissions that can add up with ETFs, which trade like stocks.
At the heart of our mutual fund portfolio is Vanguard Total Stock Market Index (Charts). The more than 3,700 equities in this fund cover every sector, from consumer goods to tech to utilities, and run the gamut from small cap to supersized.
That broad mix makes this a great core holding for any investor - and has helped edge out the S&P 500 by 1.4 percentage points a year over the past five years.
An expense ratio of just 0.19% means gains won't be drained away by management, though for those in a position to invest $10,000 or more, Fidelity's Spartan Total Market Index (Charts) carries even lower expenses.
Big blue chips have lagged smaller stocks in recent years, but as a result they present some appealing values these days.
The $4 billion Dreyfus Appreciation fund (Charts) is an excellent way to capitalize on that potential. The management team from Fayez Sarofim & Co. takes a patient approach to buying the best and biggest of blue chips, searching for sectors that can grow in coming years.
Once a name is added to the fund, it stays for a long time; turnover, at less than 10 percent a year, is exceedingly low. For an ETF play on mega-cap names, the iShares S&P Global 100 Index (Charts) offers low-cost exposure to the largest of multinationals from the U.S., Britain, and elsewhere.
Small caps have been market stars in recent years, and while they've cooled a bit lately, they can still boost your returns long term.
Three other managers now help steer this low-cost portfolio, which has grown to $3.5 billion and ranges from micro-caps to mid-caps. For ETF buyers, the vbrVanguard Small Cap Value VIPERS (Charts) offers a basket of 950 companies at an expense ratio of just 0.12 percent.
International stocks have been hot as well, and few managers have matched the performance of the team at Dodge & Cox International Stock (Charts). The fund has racked up gains of 33 percent a year over the past three years, placing it in the top 1 percent of its category.
Those outsized returns have led investors to pour in cash, but the team here has proved its ability to handle those inflows - and its willingness to close funds when necessary. Another way to buy into Europe and Asia is the iShares MSCI EAFE Index fund (Charts), which holds more than 800 stocks.
Finally, "alternative assets" like commodities and real estate are great ways to diversify your portfolio. Both have had tremendous runs recently, which makes them vulnerable to setbacks; real estate stocks have already taken a hit and may have further to fall.
But it still makes sense to own these diversifiers, particularly if you don't go overboard. One solution: a fund like Pimco All Asset (Charts), which holds a broad range of alternative assets, including commodities, international bonds, Treasury inflation-protected securities, and real estate.
ETF marketers know where the action is, so they continue to introduce funds in this hot category, including options such as the Deutsche Bank Commodity Index Tracking fund (Charts), which invests in six commodities: aluminum, corn, gold, heating oil, light sweet crude oil, and wheat.
Data as of June 7. N.A. Not applicable.