Morningstar's Top Retirement Fund Picks for Minimalists
Whether you're seeking a single-fund option or using the building-block approach, here are some of our analysts' best ideas.
Note: This article is part of Morningstar's January 2016 5-Point Retirement-Portfolio Assessment Week special report.
"Kondo-izing" is all the rage right now. Based on Marie Kondo's best-selling book, The Life-Changing Magic of Tidying Up, the basic idea behind kondo-izing (or "the KonMari method," in Kondo's lingo) is to shed all of those possessions that don't "spark joy." The net effect of that culling is that you'll be left with less stuff, and the things you do hang on to will either be beautiful or fulfill a goal especially well.
Being a minimalist also makes sense when it comes to your investment program. Indeed, many of the portfolio makeovers that I conducted late last year centered around decluttering--reducing the number of moving parts in the portfolio and hanging on to investments that provide a lot of utility in a single package. That doesn't mean every "after" portfolio consisted of a single target-date fund; in retirement, especially, I think all-in-one funds leave something to be desired, for reasons discussed here.
That said, most investors could stand to put their portfolios on a diet. Veteran investors' portfolios, especially, may more aptly be described as "investment collections" than portfolios; they're hanging on to funds and stocks that may have fit the bill at one time but no longer fit with their current investment philosophies or are redundant with something else in their portfolios.
For investors aiming to simplify their pre-retirement and in-retirement portfolios, here are some of Morningstar's favorite funds.
Minimalist Funds for Accumulators: Single-Fund Options
Target-date funds are the ultimate in set-it-and-forget-it simplicity, providing investors with an inclusive lineup of age-appropriate investments. Early results also indicate they're effective, as investors in them tend to reap much of the gains they generate. (Investors in many other fund types haven't been as successful.) Not all target-date funds are strong, as nearly all employ the "house brand" of mutual funds, but the best ones are very effective. Morningstar's top-rated target-date fund lineups are T. Rowe Price's Retirement funds and Vanguard's Target Retirement series; Premium Members can see the complete list of medalist target-date funds here.
Static-allocation funds, such as those in the conservative, moderate-, and aggressive-allocation groups, can also make sense for investors looking to reduce the moving parts in their portfolios, but they have a couple of drawbacks relative to target-date vehicles. First, they don't typically change their allocations in a meaningful way, whereas most retirement savers would like to reduce their equity allocations as retirement approaches. And with a few exceptions, allocation funds aren't typically designed to serve as standalone options; many omit important investment categories like foreign stocks and Treasury Inflation-Protected Securities. That said, the Vanguard LifeStrategy funds, all Gold rated, are worthy options for investors seeking an all-in-one fund with static asset allocations for their retirement portfolios. Less-inclusive, but still worthy, multiasset funds for accumulators include Dodge & Cox Balanced (DODBX), Vanguard Wellington (VWELX), and T. Rowe Price Capital Appreciation (PRWCX). (The last two funds are closed or otherwise limiting purchases to new buyers.) Premium Members can see the complete list of medalist funds in the domestic-allocation categories here.
Minimalist Funds for Accumulators: The Building-Block Approach
Retirement savers who would like to maintain control over their portfolios' allocations can't go too far wrong with the low costs and broad diversification that accompanies index funds and exchange-traded funds. This article delves into Morningstar analysts' favorite core index funds; those from Vanguard, Fidelity, and iShares, are well represented on the list.
Of course, active funds can serve as worthy core holdings for accumulators, too, though investors must understand and be comfortable with their style biases in order to ride out their inevitable bouts of underperformance relative to the broad market. Funds such as Dodge & Cox Stock (DODGX), Oakmark Fund (OAKMX), and the various Primecap-managed funds are good examples.
Minimalist Funds for Retirees: Single-Fund Options
The retirement-income category, a subset of the target-date universe, is home to several worthwhile multiasset funds geared toward retirees. Vanguard Target Retirement Income (VTINX) is the sole Gold-rated option in this category. T. Rowe Price's Retirement funds geared toward investors who have already reached their target dates-- Retirement 2005 (TRRFX), 2010 (TRRAX), and 2015 (TRRGX)--all earn Gold ratings as well. Analyst Jeff Holt points out that target-date funds take different tacks when the target date hits; some flatline their allocations, while others continue to change the portfolios' allocations. Premium Members can see the complete list of target-date vehicles geared toward retirees here.
Static-allocation funds, such as those in the conservative-allocation category, can make sense for retirees, too. Vanguard LifeStrategy Conservative Growth (VSCGX) and Vanguard Wellesley Income (VWINX) (the latter of which took home Morningstar's Allocation Fund Manager of the Year honors just this week) are two Gold-rated options.
Holt notes that minimalist retirees in search of income can also find worthy funds in the conservative-allocation group. Franklin Income (FKINX) and JPMorgan Income Builder (JNBAX) are two such options; both earn Bronze ratings currently. However, the funds are arguably best used as part of a more broadly diversified portfolio, in that their bond portfolios tend to be lower quality and their dividend focuses give them distinct sector biases.
Minimalist Funds for Retirees: The Building-Block Approach
As with accumulators, index funds can make a lot of sense for retirees who would like to exert control over their portfolios' asset allocations. Importantly, maintaining discrete stock/bond positions gives the retiree the ability to shake cash out of his portfolio via rebalancing; doing so would be preferable to selling a slice of an all-in-one fund and, therefore, selling a slice of both stocks and bonds at the same time. This article calls out Morningtar's favorite index products, both conventional mutual funds and ETFs.
Retirees could also reasonably focus on those funds that take a risk-conscious view of a given market segment. Here, funds like Vanguard Dividend Growth (VDIGX) and American Funds Investment Company of America (AIVSX) would be especially appropriate.
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.