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3 Fund Picks for an IRA

3 Fund Picks for an IRA
Securities In This Article
iShares Core Total USD Bond Market ETF
Diamond Hill Small Cap I
Oakmark International Small Cap Investor
Diamond Hill Small-Mid Cap I

Susan Dziubinski: Hi, I'm Susan Dziubinski for Many investors are beginning to gather their documentation for the April 15 tax filing deadline. And that's also the deadline to make contributions to an IRA for the 2019 tax year. Joining me to share some fund ideas for an IRA contribution is Christine Benz. She's director of personal finance for Morningstar.

Christine, thank you for joining me today.

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

Dziubinski: Now, let's start with a general question. If you're making a contribution to an IRA, how should you decide how to invest those dollars?

Benz: I think a good starting point for that is to take a look at where your portfolio sits today in terms of its asset allocation, how you are positioned across the Morningstar Style Box. And of course, our X-Ray tool is a great way to get a read on all of that. So, take a look at how you are doing relative to your target allocations, and use your new IRA contributions to help correct any imbalances or any changes that you'd want to make in your portfolio. The good news about an IRA is that you can make those changes without incurring tax consequences, but I feel like you might as well get the IRA contributions in on the action as well.

Dziubinski: One place that a lot of investors may be under-represented would be the small-value portion of the U.S. style box. Do you have any ideas for us there?

Benz: Yeah, we have seen this dramatic bifurcation. Small-value stocks have performed well certainly in absolute terms. But over the past year, I looked, Susan, large-growth stocks have doubled the return of small-value. So, if you haven't looked at the small-value space recently, it might be time to give it a look. And a fund I would call out here is Diamond Hill Small Cap. It has a relatively new comanager in Chris Welch, but he has been running Diamond Hill Small-Mid Cap for a while now and has had great results there. The small-cap fund is Silver-rated. It uses a focus on competitively advantaged firms. It looks to buy them when they're trading at a discount to what the management team thinks they're worth. Our analyst team thinks it's a really sensible strategy, a lot lining up in favor of this small-cap value fund. Of course, you could use an index fund for small-cap value exposure as well.

Dziubinski: Another area where investors might want to top up a little bit is international stocks.

Benz: Right--we've been banging this drum for a while!

Dziubinski: Yeah.

Benz: And really, here's another area where if you look over the past decade, the MSCI EAFE Index has returned just half of what the U.S. market has returned. So, a substantial level of underperformance. When that will revert, whether that will revert, is anyone's guess. But I think it's probably something that investors should take a look at, potentially doing some repositioning with respect to their foreign stock holdings, adding a little bit of oomph behind their foreign stock holdings, adding more money to foreign stocks. So, a fund I would mention here is a contrarian-leaning fund, a high-conviction fund for sure: Oakmark International. It's one that we've liked a lot for many years. David Herro has been in the seat here as lead manager since 1992--even longer than I've been here at Morningstar! A very seasoned manager. He has been bringing up a comanager; Michael Manelli has been working alongside him. This is a fund that does require some patience because it will have periods where it will look pretty bad relative to its peer groups. But it truly, in my view, defines active management: If you're going to pay for active management, you want someone who is really running a high-conviction portfolio, as this fund has been. This one is Gold-rated.

Dziubinski: And then, your last pick is a core bond fund. How should investors be thinking about adding bonds to their portfolio?

Benz: The way I look at it is, we've had this long-running rally in the equity market overall--more than 10 years today--and meanwhile, we're all 10 years older than we were when this began. Investors who are getting close to retirement who haven't looked at their portfolios' asset allocations for a while, they've been hands-off--which is how you should be--you might want to think about adding a little more to the safe portion of your portfolio. And so, a fund that I would mention, this is kind of the linchpin holding in my ETF portfolios, is iShares Core Total USD Bond Market and the ticker is IUSB. It's a lot like a Bloomberg Barclays Aggregate tracker, but it has a little bit of a kicker in that it holds some low-quality bonds--not a lot, sub-10% position currently--but nonetheless a position in lower-quality bonds. So, I think it actually makes it a little more inclusive and diversified than the total market trackers. It's a Gold-rated ETF, and I think it's just a nice choice for one-stop fixed-income exposure. We've got it in the core-plus intermediate-term bond category. It will have a little bit more volatility, especially in periods of economic weakness, than a Bloomberg Barclays Aggregate tracker. But I still think it's a good hands-off, low-maintenance, one-stop choice for fixed-income exposure.

Dziubinski: Sounds great. Well, April 15 will be here before we know it. So, thank you very much for these fresh ideas, Christine.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski for Thanks for tuning in.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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