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3 Funds for an IRA

Christine Benz
Susan Dziubinski

Susan Dziubinski: Investors have until April 15 to make an IRA contribution if they want it to count for 2018. Joining me today to discuss three very different investment ideas for an IRA is Christine Benz, Morningstar's director of personal finance.

Christine, it's a pleasure to be here with you.

Christine Benz: Susan, it's great to be here with you.

Dziubinski: Now, your first pick is a fund that focuses on foreign stocks. Why do you think it's important for investors today to be considering this asset class?

Benz: Well, the main thing is that we've seen foreign stocks dramatically underperform U.S. stocks. I know that a lot of U.S. investors are really feeling impatient with their foreign stock holdings. They have seen them underperform for so long. But anytime you see an asset class underperform, that's oftentimes when you should be topping it up, which is why I'm such a big believer in rebalancing, where you restore order to your asset class exposures. Foreign stocks, I think, are a place to look if you are adding new money to your portfolio at this time.

A fund I like for foreign stock exposure is called American Funds International Growth and Income. A lot of investors say, whoa--American Funds, those are load funds, I'm a no-load, do-it-yourself investor. The good news is that they have some terrific funds and they are available on no-load, no-transaction-fee platforms, like Schwab's and other brokerage firms. That's a good development for investors. This is a fund that our analyst team has given a Gold rating because they like its strategy. It's a disciplined value-conscious strategy that focuses on dividend-paying companies overseas. It has a reasonable price tag, and Americans Funds tends to hang on to its managers for many years. There are a lot of things to like about this particular fund. I have made it the core foreign stock holding in my Bucket portfolios, my mutual fund portfolios, and it's also the core foreign stock holding in my Schwab model portfolios.

Dziubinski: Your second idea is a TIPS fund. Now, who are TIPS funds best for? And why are TIPS funds a good fit for an IRA wrapper?

Benz: TIPS are Treasury-Inflation-Protected Securities. These are bonds issued by the U.S. Treasury. But the neat thing about them is that when we see inflation go up, the TIPS holder gets a little bit of an adjustment in his or her principle to account for that inflation. The reason why I would look to TIPS for older adults, in particular people who are getting close to or are in retirement is that when you are retired, and you are not taking a paycheck from an employer anymore, you are not getting those cost of living adjustments. You may be getting them through your Social Security paycheck, but the portfolio of your portfolio that you are withdrawing to live on is not automatically inflation-adjusted. Adding some TIPS to your portfolio can provide that inflation insulation. The fund that our analysts like or one of the funds that our analysts like in this category is called Schwab US TIPS ETF. It's a very low-priced index-tracking product. When our analysts have looked at this TIPS category, that's one conclusion that they have come away with, that active management hasn't really made a good case for itself here, you're better off indexing, keeping things really cheap and getting pure exposure to the asset class.

Dziubinski: Now, your last pick for an IRA may surprise some viewers, particularly since a lot of our viewers tend to be do-it-yourself investors.

Benz: Right. This is Vanguard Target Retirement--name your target retirement date. I like this suite of funds quite a bit because a lot of us use our IRAs to augment our company retirement plan assets. If you are just sort of stashing money in your IRA every year and don't have a lot of time to pay attention to it, if you have a good target-date fund, it can more or less run itself. That's one reason why I like a target-date fund in this context. The other thing to like about the Vanguard suite in particular is that these are very low cost, very minimalist sorts of products. They are composed of index funds. They are globally diversified, so they are quite global for young investors and even for older investors who have heavier fixed-income allocations, they retain a component of foreign bond exposure as well. I think that they are just great set it and don't-pay-a-lot-of-attention-to-it holdings.

Dziubinski: Christine, these are a lot of really thoughtful ideas today. Thank you for sharing them with us.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar.com. Thank you for watching.