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