Consider small-cap, TIPS, real estate, commodity, and distressed-security funds.
You can do quite well in your investment life only holding American funds, but investors attached to the family may occasionally want to venture away for something that it doesn't offer. After all, its large-cap stock funds are rather similar, its lone small-cap fund leaves something to be desired, and it doesn't run niche funds that stress a single sector or smaller asset class. This month, I'll discuss where you can get exposure to what American lacks. I'll assume American Funds investors work with a full-cost broker and will be limited to funds with loads.
First, investors may very well want to choose a different small-cap fund than American Funds Smallcap World
Investors would have to replace Smallcap World with two funds, one domestic and one foreign. Diamond Hill Small Cap
Treasury Inflation-Protected Securities
Second, investors may want a fund dedicated to Treasury Inflation-Protected Securities or bonds in their portfolios. These are loans to the U.S. government that pay semiannual interest, just like plain Treasuries, but their coupons and underlying principal, or face value of the bond, are automatically increased as one of the main measures of inflation, the Consumer Price Index, increases.
TIPS seem like a perfect investment, though debates rage about whether the CPI is a good measure of inflation or whether the government understates price increases. Also, TIPS' market prices can fluctuate relatively widely depending on whether investors think inflation is rampant and protection deserves a premium, or whether they think it's at bay and protection against it isn't very valuable. A good way to figure out if TIPS are a good deal is to compare them with plain U.S. Treasuries (those without inflation protection). If a plain or "nominal" Treasury is yielding 3%, and TIPS are yielding 2%, then the break-even inflation rate is 1%. In other words, the market is assuming 1% inflation. If you think there is, or will be, more inflation than 1% for the period to maturity, then TIPS would be a good investment in our hypothetical example.
Assuming that you're working through an advisor who deals with load funds, a good TIPS fund is PIMCO Real Return
American doesn't think TIPS constitute a separate asset class, and, therefore, hasn't rolled out a fund dedicated to them. It prefers allowing its bond managers to own them in their diversified bond funds as they see fit depending on their assessment of the instruments' valuation at a given moment. That's a legitimate approach, but so is permanently owning a fund dedicated to TIPS, as long as you don't think that the government cheats too badly on the CPI.
Another fund that could complement an American Funds portfolio is a real estate fund dedicated to real estate investment trusts. Real estate funds have gone from being sleepy diversifiers to some of the most volatile funds available. In the wake of the technology meltdown earlier in this decade, investors flocked to real estate funds because they preferred to invest in hard assets as opposed to firms dedicated to making money from the Internet. REITs also pay high dividends, which investors began to find exciting again. REITs are organized so that they avoid income tax at the corporate level in exchange for being forced to pay out 90% of their reported earnings as dividends.