3 Ways to Simplify Your Investment Portfolio in 2023 (2024)

Around this time each year, many of us resolve to take on a new good habit (or two) in the coming year. Maybe it’s exercising more or eating less. Or reconnecting with family, or disconnecting from electronics.

Many investors could benefit by resolving to simplify their portfolios. Why?

“Clutter in your financial life—like clutter on your desktop—has the potential to distract you from the main jobs at hand,” says Morningstar director of personal finance Christine Benz. “You may not bother reviewing and maintaining your portfolio if it has too many moving parts.”

Further, if something should happen to you, a complex portfolio could make life difficult for your loved ones who are left behind. Take time to simplify your portfolio so you can pass it on, if need be.

How to Simplify an Investment Portfolio

Here are three strategies that investors can use to build simple portfolios.

1) Swap your actively managed funds for indexed investments.

2) Favor broad all-market equity funds instead of a collection of style-specific equity funds.

3) Delegate some/all of your asset allocation to a target-date or allocation fund.

Here’s a little bit about each strategy as well as some exchange-traded funds and mutual funds to research further.

Strategy 1: Swap your actively managed funds for indexed investments.

Index funds are passive investments, which means they have no key-person risk and no strategy surprises—and therefore arguably require less monitoring then their actively managed counterparts. Some might say that you can’t beat the market if you’re indexing it, which is of course true. But is a shot at beating the market really worth the extra monitoring? For most investors, probably not.

There are highly rated index funds in all of the main investment categories to choose from, whether you’re seeking growth or value stocks or a combination of the two, large or small companies, foreign stocks, and even bonds. Find a complete list of the highest rated passive mutual funds and ETFs across categories in The Best Index Funds.

Among core domestic large-company ETFs and mutual funds, top index fund choices include Schwab US Broad Market ETF SCHB, iShares Core S&P Total US Stock Market ETF ITOT, and Vanguard Total Stock Market Index VITSX VTI.

Among index international-stock funds, we like the Gold-rated Vanguard Total International Stock Index VTIAX VXUS and iShares Core MSCI Total International Stock ETF IXUS, among others.

And lastly, some of our top passive bond-fund choices include Vanguard Total Bond Market Index VBTIX BND and iShares Core Total USD Bond Market ETF IUSB.

Strategy 2: Favor broad all-market equity funds instead of a collection of style-specific equity products.

Experts have drummed into our heads the value of intra-asset-class diversification. After all, sometimes growth stocks will lead the market, while other times, value prevails. As such, say the experts, make sure you have exposure to both styles. Also, small caps have periods of outperformance over large caps, so be sure to own both. And international stocks can zig when the U.S. market zags; don’t forget about emerging-markets equities!

Those of us who’ve heeded that advice probably have dedicated large- and small-cap funds, individual value and growth funds, and perhaps even multiple international funds.

Do we really need all of these building blocks to have a well-diversified investment portfolio, or can one or two broad-based funds do the job instead?

Of course, far-reaching index funds—many of those already mentioned—can provide sufficient diversification. For instance, pairing Vanguard Total Stock Market with Vanguard Total International Index gives you exposure to a significant chunk of the global stock market. Just two funds, but plenty of diversification—and at a low cost, to boot.

But actively managed funds can fit the bill, too. Find a list of top-rated ETFs and mutual funds in the U.S. large-blend Morningstar Category in The Best Core Stock Funds. Among international stock funds, some active, wide-ranging options include Gold-rated American Funds International Growth and Income IGFFX and FMI International FMIJX. Find top international stock fund ideas in The Best International Stock Funds.

To really simplify an equity position, investors might pluck a fund from one of Morningstar’s global stock categories. Funds in this group focus both on U.S. and international stocks, thereby providing global diversification in one investment. Some of the highest-rated global stock funds include Dodge & Cox International Stock DODFX, T. Rowe Price Global Growth Stock RPGEX, iShares MSCI ACWI ETF ACWI, and Vanguard Total World Stock Index VTWIX VT.

Strategy 3: Delegate some/all of your asset allocation to a target-date or allocation fund.

The previous two ideas assumed that investors want to retain control of their stock/bond mix. But for those who would prefer to back away from being hands-on with their asset mix, allocation or target-date funds may be of interest.

Both allocation and target-date funds combine stocks and bonds in one portfolio, providing asset-class diversity in a single fund and thereby reducing the need for a lot of oversight.

Allocation funds typically rebalance back to a target stock/bond mix. And those stock/bond blends can be conservative (holding 15% to 30% in equities and the rest in bonds), aggressive (which hold more stocks than bonds), and moderate (whose stock/bond splits are somewhere in between). Some top allocation funds include Fidelity Multi-Asset Index FFNOX, T. Rowe Price Balanced RPBAX, and Vanguard Wellesley Income VWINX.

Morningstar Investor members can gain access to a complete list of highly rated allocation ETFs and mutual funds here.

Unlike allocation funds, target-date funds don’t rebalance back to a target stock/bond mix. Instead, these funds provide an age-appropriate asset mix and then generally make that mix more conservative as time goes by, increasing the bond position and decreasing the equity stake. The idea is to pick a target-date fund close to the year that you intend to retire. The American Funds Target Retirement Series, BlackRock LifePath Index Target-Date Fund Series, Pimco Real Path Blend Series, and T. Rowe Price Retirement Series all earn Gold ratings for their cheapest share classes.

For more about target-date funds, read The Best Target-Date Funds.

More About Simplifying Your Investment Portfolio in 2023

Of course, be sure to simplify in a tax-smart way. For some, that may mean limiting streamlining to tax-deferred accounts. Or it may call for only modest changes in a taxable account, where you can carefully offset gains with losses.

Uncover top mutual fund and ETF picks from a source that investors trust. Morningstar Investor’s mutual fund and ETF ratings, analysis, and insights are all backed by our transparent, meticulous methodology. Learn more and start a seven-day free trial today.

The author or authors own shares in one or more securities mentioned in this article.Find out about Morningstar’s editorial policies.

3 Ways to Simplify Your Investment Portfolio in 2023 (2024)

FAQs

3 Ways to Simplify Your Investment Portfolio in 2023? ›

Using a three-fund approach to investing in its truest sense means sticking with the domestic stock, international stock, bond index fund formula. Investing in real estate or cryptocurrency would mean straying away from the core of how a three-fund portfolio works.

How to simplify an investment portfolio? ›

How to Simplify an Investment Portfolio
  1. Swap your actively managed funds for index funds.
  2. Favor broad all-market equity funds instead of a collection of style-specific equity products.
  3. Delegate some/all of your asset allocation to a target-date or allocation fund.
Oct 4, 2023

What is the 3 way investment strategy? ›

Using a three-fund approach to investing in its truest sense means sticking with the domestic stock, international stock, bond index fund formula. Investing in real estate or cryptocurrency would mean straying away from the core of how a three-fund portfolio works.

What is the 3 portfolio rule? ›

The three-fund portfolio consists of a total stock market index fund, a total international stock index fund, and a total bond market fund. Asset allocation between those three funds is up to the investor based on their age and risk tolerance.

What 3 factors should you consider about yourself when thinking about investing? ›

3 Key Factors to Consider When Investing
  • Risk – How Much You're Willing to Risk Is Determined by Your Risk Tolerance.
  • Goals – As You Plan Your Strategy, Think About Your Investment Goals.
  • Diversification – Investing Across Asset Classes and Within Asset Classes.
  • Consider These Factors Before Investing.
Nov 3, 2022

What is portfolio simplification? ›

Product portfolio simplification is simply measured by the number of products that are eliminated rather than the overall complexity reduction. This bears the risk of eliminating lots of irrelevant products but not reducing complexity of the main products that essentially drive cost.

What is a good investment portfolio breakdown? ›

Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.

What are the 3 major types of investment styles? ›

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies.

What is a 3 part investment strategy? ›

A 3 fund portfolio is a diversification approach whereby the investors put their money in a certain ratio in three different asset classes, i.e., domestic stocks, domestic bonds, and international stocks. It is a simple, low-cost investing approach that ensures retirement savings at a minimal risk appetite.

What are the 3s of investing? ›

Investing can be overwhelming, but with the guidance of three fundamental pillars, you can move forward with confidence. These foundational pillars are Faith in the Future, Patience in the Presence, and Discipline in Your Decisions. Let's dig deeper into each one.

What are the 3 parts of a portfolio? ›

Every portfolio must contain the following essential elements:
  • Cover letter – This element tells about the author of the portfolio and what the. ...
  • Table of contents with numbered pages - Shown in this element are the detailed. ...
  • Entries – both core (items students have to include) and optional (items of student's.

What are the 3 A's of investing? ›

Amount: Aim to save at least 15% of pre-tax income each year toward retirement. Account: Take advantage of 401(k)s, 403(b)s, HSAs, and IRAs for tax-deferred or tax-free growth potential. Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

What are the three golden rules for investors? ›

The golden rules of investing
  • Keep some money in an emergency fund with instant access. ...
  • Clear any debts you have, and never invest using a credit card. ...
  • The earlier you get day-to-day money in order, the sooner you can think about investing.

What are 3 things every investor should know? ›

Three Things Every Investor Should Know
  • There's No Such Thing as Average.
  • Volatility Is the Toll We Pay to Invest.
  • All About Time in the Market.
Nov 17, 2023

What are the three key factors of investment? ›

Key Takeaways

Factors that have been identified by investors include: growth vs. value; market capitalization; credit rating; and stock price volatility - among several others.

What are the three steps in investing? ›

3 steps before investing
  1. Analyse your financial situation. Before making any investment, start by asking yourself the following questions: is your work situation stable? ...
  2. Define your objectives and level of risk. Every investor is unique. ...
  3. Know your investment options. ...
  4. Test your knowledge.

What is the 80 20 rule investment portfolio? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

What is the 5 portfolio rule? ›

This rule suggests that investors should not allocate more than 5% of their portfolio in any one stock or investment. The idea behind this rule is to limit the potential risk to the overall portfolio if one investment does not perform as expected.

What is the 4 rule in investing? ›

The 4% rule entails withdrawing up to 4% of your retirement in the first year, and subsequently withdrawing based on inflation. Some risks of the 4% rule include whims of the market, life expectancy, and changing tax rates. The rule may not hold up today, and other withdrawal strategies may work better for your needs.

What is the 5 rule of investing? ›

This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security. This protects against material losses should that single company perform poorly or become insolvent.

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