So many investment choices, so many potential portfolio decisions. The inventory of stocks, bonds, funds and other financial assets for sale is big enough to fill a big-box store. But there’s a downside to shopping at financial supermarkets: It injects complexity into the investing process.
That can lead to portfolio miscues, such as chasing highfliers that have already run up in price, investing in assets you don’t understand or buying a bunch of funds that own many of the same stocks (which means you’re less diversified than you think). “The more complex your portfolio is, the easier it is to get out over your skis,” says Matt Fleming, a wealth adviser at Vanguard Personal Advisor Services.
The good news? You can play it simple and build a portfolio using just one to three funds. If you choose correctly, you’ll get a low-cost, diversified mix of stocks and bonds that’s easier to track and manage. Here are three ways to build a slimmed-down, simple portfolio. (Returns and other data are as of September 10.)
One-stop shopping. If stock picking or fund selection isn’t your strong suit, consider a target-date fund, a single-fund portfolio that holds stocks, bonds and sometimes cash in various combinations. The beauty of these savings vehicles, found in most 401(k) plans, is that the fund (which typically holds other funds) makes the investment decisions for you, including periodic rebalancing to make sure your mix of holdings doesn’t get out of line with your risk tolerance.
The fund managers determine how aggressive or conservative the fund’s asset mix should be based on how many years you are away from retirement (or another savings goal serving as your “target”). All you have to do is fund the account. “It puts your portfolio on autopilot, but pros are in the cockpit,” says Jeffrey Wood, an investment adviser at Lift Financial.
The closer you get to your golden years, the less risky your target-date portfolio becomes. The fund dials back more-volatile stock holdings and boosts the weighting in tamer bonds as your hair turns gray. If you’re 40 and want to retire at 65, you might consider a fund with a target date of 2045. T. Rowe Price Retirement 2045, for example, held roughly 90% in stocks and 10% in fixed-income investments at the end of the second quarter, according to fund tracker Morningstar. In contrast, retirees who own T. Rowe Price Retirement 2020 have just 51% in stocks and 49% in bonds.
A fund’s “glide path” (or how its portfolio transitions from aggressive to conservative over time) varies by fund firm. Over the long haul, a target-date series that has a larger stock allocation will likely post bigger returns but carry more risk.</…….