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Great Investments for Getting Started

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. As with many things in life, getting started can be one of the toughest steps of investing, but Morningstar's Christine Benz has some great ideas for starter investments to help get you going. She is joining me today. Thanks for being here Christine.

Christine Benz: Jason, great to be here.

Stipp: So before we start to talk about these great starter investments, there are a couple of questions that an investor starting out might want to ask before starting to select individual holdings.

Benz: That's true. One of the first steps would be asset allocation, so think about what is a logical stock/bond mix where given where you are in your life stage. That is arguably the most fundamental decision that every investor should make. Then I think another more philosophical question is how hands-off or hands-on do you want to be with your portfolio. Do a little bit of soul searching.

If it turns out that you really don't care to spend a lot of time managing your investments, you might want to set up a portfolio that allows you to be very hands-off. If you do want to have tighter control over your asset allocation and maybe you are also willing to invest with active managers who you think have the ability to outperform and you want to spend time selecting them, then you are okay with a more hands-on type portfolio.

Stipp: So we're going to talk about some ideas for both sorts of investors today. The first one is for those people who might want to be hands-on with their asset allocation. But also its an easy way to do that as far as managing the investments using ETFs. What are your ideas?

Benz: So ETFs and traditional index funds great building blocks for starter portfolios. One reason I would call out ETFs especially right now is that one of the big barriers for smaller investors has come down on many brokerage platforms, so you aren't paying fees to buy and sell -- trading costs to buy and sell ETFs.

So one of the core ETFs I would point to is Vanguard Total World Stock Market ETF and so this is an index fund that tracks the global market capitalization and to me it's a logical extension of indexing. So if you believe that by indexing you are just going to let the chips fall where they may, you are not going to make decisions about sectors or market cap or anything else. To me, using a truly global portfolio that is indexed is the logical extension of that thought process.

Stipp: If you wanted to be a little bit more hands-on and manage your domestic versus your international there are some ideas for that as well.

Benz: Right, so you could go with Vanguard Total Stock Market ETF that is VTI is the ticker and then Vanguard FTSE All-World ex-US ETF would be an idea for the foreign component and that would give you a little more hands-on control over that global decision.

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Stipp: So a lot of investors who are just starting out, probably were going to have lot more in equities, they might not have any bond holdings if they are young enough potentially. But as you get older you probably will want to start to mix fixed income in there, so what ideas might you have for great starter funds on that front.

Benz: Well if you want to keep it simple, you'd simply go with that total bond market ETF. I think people who look at the bond market like our colleague Eric Jacobson might say well there is a lot about bond indexing that is not quite as perfect as stock market indexing. But over time total bond market indexes have been a pretty good mousetrap. So you could look at something as simple as Vanguard Total Bond Market ETF or the traditional index fund.

Stipp: So really for this group of investors one of the nice things about these index funds is you know what you are getting. You know what exposures that you are getting so then when you want to manage that asset allocation. You are using very defined building blocks to do that.

Benz: So you know that none of these stock funds are going to be suddenly switching in to cash and throwing-off your carefully laid asset location plan, there is a lot of transparency there.

Stipp: Okay. So, there is another type of investor that maybe doesn't even want to have to deal with the changing of the asset allocation in fact and really just wants to be much more hands-off. What are some great starter funds for that group of folks?

Benz: Well, there I would point people to target-date funds and certainly not all target-date funds are good, but the concept is good. So, these funds have asset allocation mixes that are somewhat age appropriate or very age appropriate and then they gradually get more conservative as the person gets close to the target date.

Two of Morningstar's favorite series are Vanguard's Target Retirement series as well as well T. Rowe Price's Retirement Target-Date funds. T. Rowe's are a little more aggressive and stock heavy, but both are really good and low cost. Vanguard's are at the lowest costs because they do use all index funds. T. Rowe's are relying on active funds, so the costs are a little bit higher, but still pretty reasonably priced for well diversified package.

Stipp: So Christine beyond target-date dunds, there is also another group of funds that have static allocation, static stock and bond, they can also be good all in one tools as starter funds.

Benz: Well, you could look to a simple static balanced fund. But if you were a person just starting out, so someone with a very long time horizon who wanted a primarily stock heavy portfolio, one fund I really like is T. Rowe Price Spectrum Growth. This does include a lot of T. Rowe's best actively managed funds including T. Rowe price equity income as well as some foreign exposure. This is a static portfolio. So, it's not going to get more conservative for you as you get older you have to add bonds to the mix as you need them but it's a really nice, sturdy, easy to recommend fund.

Stipp: Then there are also some investors as you mentioned before, that are interested in active management. They want to have those managers who are going to go out and seek opportunities and have a chance to beat the market, might have a chance of also underperforming. But if you pick good managers, ones with a great track record, that could pay off you over time. What are some of your ideas for great starter funds among the actively managed set?

Benz: Yeah. So, some of the funds, I really like, maybe something like Longleaf Partners, which I personally own, may be a little too aggressive to be a starter fund. It's going to have too many ups and downs, if it's someones sole fund for a while.

So, I might bypass more volatile funds like that and instead look to maybe some of the funds within the Dodge & Cox family. I think that's a firm that really exemplifies truly active management, of course the firm's Stock and International Stock and Balance funds are well known.

But I also like its Global Stock Fund that is one of those funds that can range anywhere throughout the world snd it uses that Dodge & Cox value discipline. Also Dodge & Cox is a firm that in my mind really exemplifies good stewardship, the values that we like to see among fund managers. They don't do a lot of advertising tend to retain managers for many years. They just do a lot of things right from that standpoint and the fund has very low costs.

Stipp: So, great partners to have for the long term.

Benz: Right.

Stipp: So, Christine, sounds like some great ideas for getting going. No excuses for investors not to start getting some money in the market. Thanks so much for joining me today.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.