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Course 107
A Simple Portfolio


A purple-gold sunset. A perfectly grilled hamburger. Laughter. Scratching an itch.

The simple things in life can bring great joy. And a simple investment portfolio can bring great profits.

Choosing investments doesn't have to be complicated. By estimating the cost of your investment goal, articulating your risk philosophy, building your emergency fund, establishing your asset allocation, and conceptualizing your core portfolio, you've already done the hard work.

Now, you merely need to select some core investments to get you where you need to go. Here's a simple way to do just that.

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.

Build a Simple Portfolio

Now let's build a diverse yet simple portfolio using's Instant X-Ray.

Michael has $10,000 to invest. He wants to retire in 35 years.

After tinkering with his asset mix, Michael decides to be aggressive: he wants his asset allocation to be 0% bonds and cash, 70% large-cap U.S. stocks, 10% small-cap U.S. stocks, and 20% foreign stocks.

He decides to put $8,000 in Vanguard Total Stock Market VTSMX to cover the large- and small-cap allocations and $2,000 in American Funds EuroPacific Growth AEPGX to cover the foreign position.

You can enter Michael's portfolio into's Instant X-Ray tool. After inserting the information, click "Show Instant X-Ray" at the bottom of the screen to see the results.

Given that Michael has many years until he draws on his portfolio, this mix looks good. It's diversified by investment style, with roughly three fourths of his assets in large-cap stocks and the rest in mid- and small-cap stocks. The portfolio isn't terribly overweight or underweight in a single sector, nor is it overexposed to one type of stock relative to the market.

Pretty simple, huh?

Quiz 107
There is only one correct answer to each question.

1 Why are funds better choices than stocks for investors seeking simplicity?
a. Funds provide better diversification than individual stocks.
b. Funds perform better than individual stocks.
c. Funds are less expensive than individual stocks.
2 Simplicity seekers should think in terms of
a. Both core and noncore holdings
b. Core holdings only
c. Noncore holdings only
3 Which type of bond fund would make the best choice for a simple portfolio?
a. An intermediate-term, low-quality bond fund
b. A long-term, high-quality bond fund
c. An intermediate-term, high-quality bond fund
4 Which types of funds are essential for a simple portfolio?
a. U.S. stocks and bonds only
b. Large- and small-cap U.S. stocks, bonds, and foreign stocks
c. It depends on your asset allocation
5's Instant X-Ray feature will tell you?
a. How much you need to invest to meet your goals.
b. How diverse your portfolio is.
c. What funds our analysts recommend.
To take the quiz and win credits toward Morningstar Rewards go to
the quiz page.
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