Note: This article is part of Morningstar's 2019 Portfolio Tuneup week. A version of this article appeared on Jan. 24, 2018.
One of my friends lives in a perfect but petite house. To keep clutter from taking over, she operates with a simple principle: Nothing can come in without something going out. If she buys a piece of pottery on a trip or a new pair of shoes, she's simultaneously strategizing about what she'll donate, recycle, or throw away to make room for it.
Wouldn't it be great if we all operated with a similar principle for our investment portfolios? Some investors do, of course. But unless you're vigilant, you'll likely end up with more investment accounts--and more underlying investments--than you actually need.
There's that brokerage account you opened when you were keen on picking stocks but haven't revisited in years, and the IRA that you rolled over from your old 401(k) and haven't gotten around to rolling into your other IRA assets. Given that each of these accounts comes with its own basket of investments, it's not surprising that many individuals' and couples' holdings can pile up and might even run into the hundreds.
The good news is that it doesn't have to be this way. This article shares some tips for reducing the complexity of your total portfolio--at the account level and in other respects, too. And when it comes to selecting investments for each part of your portfolio, you can really skinny things down by focusing on investments that provide a lot of diversification in a single shot.
Here are some of Morningstar analysts' favorite funds for retirement accumulators as well as for folks who are already retired.
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. 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 BlackRock's LifePath Index series and Vanguard's Target Retirement series; Premium Members can see the complete list of Medalist target-date funds here.
Static-allocation funds 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), Fidelity Four-in-One Index (FFNOX), Vanguard Wellington (VWELX), and T. Rowe Price Capital Appreciation (PRWCX). (The last two funds are closed or otherwise limiting purchases to new buyers.) Vanguard Tax-Managed Balanced (VTMFX) is a super choice for taxable accounts. 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. Several traditional index funds garner top ratings from Morningstar analysts; most core index funds reside in Morningstar's large-blend, foreign large blend, and intermediate-term bond categories. Readers can see a complete list of analysts' favorite ETFs here.
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 target-date retirement category, a subset of the target-date universe, is home to several worthwhile multiasset funds geared toward retirees. Vanguard Target Retirement Income (VTINX) and BlackRock LifePath Index Retire (LIRKX) receive Gold ratings from Morningstar's analyst team. 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 here.
Static-allocation fund can make sense for retirees, too. Vanguard LifeStrategy Conservative Growth (VSCGX) and Vanguard Wellesley Income (VWINX) are two Gold-rated options that fall into the Allocation--30% to 50% equity category. Retirees who desire higher equity allocations can look to fine options such as Vanguard LifeStrategy Moderate Growth (VSMGX).
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. Investors seeking core index funds can find excellent options among Morningstar's Medalist funds in the large blend, foreign large blend, and intermediate-term bond categories. Vanguard Dividend Appreciation, available as either an ETF (VIG) or a traditional index fund (VDADX), is a core equity position in many of my model Bucket portfolios for retirees.
Of course, active funds can make sense in retirement, too. In addition to some of the names mentioned in the Accumulator discussion above (Dodge & Cox, Oakmark, Primecap, etc.), it's worth noting that American Funds are now available without loads or transaction fees on the Schwab platform. Funds like American Funds Fundamental Investors (AFIFX) and American Funds Washington Mutual (WSHFX) and American Funds International Growth & Income (IGIFX) are stellar core options. Nor should retirees ignore core funds that play solid defense; AMG Yacktman (YACKX) is one such option.
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.