|Course 107: A Simple Portfolio|
|Mutual Funds: The Simple Choice|
Thanks to Portfolio Course 105: Determining Your Asset Mix, you already know about the importance of setting your portfolio’s weightings in the three basic asset classes: stocks, bonds, and cash. You also know if your portfolio will have any small-company or foreign-stock assets. Now, you need to fill in the specifics by choosing actual investments.
Investors seeking simplicity should go directly to mutual funds. Do not pass go, do not collect $200, and do not buy stocks and bonds directly.
Why? Funds generally require less monitoring than individual securities do. Further, funds are well diversified--one fund can own hundreds of securities. As a result, they're less volatile than individual securities are.
Moreover, simplicity seekers should think only in terms of core holdings. As we explained in Portfolio 106: Core vs. Noncore Investments, all you really need are core holdings. The rest is often frills.
For your U.S. stock exposure, low-cost index funds can be a great choice. To kill two birds--your large- and small-company U.S. stock exposure--with one stone, choose a fund that invests in the entire U.S. stock market, such as Vanguard Total Stock Market (VTSMX).
For foreign stocks, consider Morningstar's foreign-stock category picks, such as those in the foreign large-blend category. Here again, an index fund that provides inexpensive market exposure in a single shot can make a solid core foreign-stock fund choice, as can an actively managed fund provides geographically diversified exposure.
For bonds, focus on the options that favor high-quality intermediate-term bonds and carry low expenses--no need to take on extra interest-rate or credit risk for a shot at a modestly higher return. If you're in a high tax bracket and investing in a taxable account, consider a municipal-bond fund, because income from munis is typically exempt from federal and in some cases state income tax.
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|Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.|
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