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By Jason Stipp and Christine Benz | 04-17-2014 11:00 AM

Benz: My Favorite Boring Funds

Boring investments tend to keep people in their seats, which leads to better outcomes, says Morningstar's director of personal finance.

Jason Stipp: I'm Jason Stipp for Morningstar. Fasten your seat belts because it's about to get boring here at Morningstar. I'm joined by Christine Benz, who by the way is not boring, but she does have some boring fund ideas.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: First of all, why boring? Why is boring something you'd want to look for in your investment portfolio?

Benz: A couple of reasons. One is that life is interesting enough. You probably don't need to have your investments be super exciting. Definitely the longer I have done this, the more I have been attracted to very boring investments.

The other key reason is that boring investments tend to keep people in their seats. They tend to lead to better outcomes, and here I'm using boring as kind of a proxy for lower volatility. When we look at our investor-returns data, which is return data that looks at when investors purchased various investment types and when they sold them, what we see is that lower-volatility investments tend to produce better outcomes. Investors buy them and they hang on, and that's really what we want to get people to do.

Stipp: Better investment returns and a smoother ride can lead to good results from a boring investment. You have a few here that we'd like to talk about. The first is Vanguard Dividend Growth. Why is this a good boring fund?

Benz: This is a good pick for a couple of reasons, and I have used this fund in some of the bucket portfolios that I have created for retirees. I have also used Vanguard Dividend Appreciation which is an exchange-traded fund that uses a similar strategy in the ETF bucket portfolios. And I like it because it's kind of a high-quality cut on the overall market. The fund prioritizes companies that have a history of paying dividends as well as growing them.

I think it's important to point out that it doesn't look for companies that have high dividend yields in absolute terms, but it likes companies that pay a dividend and have grown them historically. It tends to exclude some of the higher-flying names in the market, so technology has historically not been well-represented in this particular fund. But I think that's OK. 

The returns over time have been competitive with the broad markets, but volatility has been much lower. The S&P 500 over the past 10 years has a standard deviation of about 15. This fund's standard deviation is about 12. So it's a substantially smoother ride with lower volatility, and what we see is that investor returns for this particular fund have been really good over any time period that you want to examine.

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