By Andrew Leckey
July 8, 2007
Today's investors rarely adhere to the "less is more" philosophy of the minimalist architect Mies van der Rohe. Unsure of which funds to choose, they buy as many as they can afford from whatever performance and recommendation lists they come across.
This strength-in-numbers approach can produce a mix that over time becomes either Frankenstein's monster or a long row of identical twins.
You shouldn't sleep better just because you own more funds than your neighbor. In part, owning too many will likely mean you can't keep track.
We asked some fund experts to pick four funds different enough from each other to constitute a diversified portfolio. This is minimalist investing.
"Most investors are attracted to one area in the marketplace in a given cycle and buy three or even four funds in that particular marketplace," said Jim Lowell, editor of the independent Fidelity Investor newsletter in Watertown, Mass.
After 10 years it isn't uncommon to find investors with 25 funds so closely correlated that they behave just as a portfolio of four different funds would, he said.
"It is silly to have a lot of funds because it means too much duplication," said Thurman Smith, editor of the Equity Fund Outlook in Boston.
Owning 25 funds is "crazy," he said, with eight funds or less much more realistic because it still permits you to cover most categories and styles.
"For something like this you'd want to stick with the tried and true," said Christine Benz, director of mutual fund analysis for Morningstar Inc. in Chicago. "My first choice for someone wanting to keep things streamlined is a target-date fund, in which you choose a fund that matches the date you plan to retire."
Smith's choices and rationale:
-- Fairholme Fund (FAIRX) owns 22 high-quality, mid- to large-cap stocks with particular emphasis on insurers and energy. It is consistent without a lot of risk or loss of principal. It invariably pulls through, so you needn't watch it every month. Three-year annualized return of 20 percent.
-- Kinetics Paradigm (WWNPX) is managed by an imaginative team that tracks developing trends and firms that benefit. It doesn't buy overpriced stocks, has low turnover and its mid- to large-cap stocks vary from distressed utilities to financial firms. Three-year annualized return is 25 percent.
-- Harbor International Fund (HIINX) is a large-cap foreign stock fund that blends growth with reasonable price. This consistent winner has average risk. While favoring Europe, it also has holdings in virtually every global region. Three-year annualized return is 28 percent.
-- Manning & Napier Equity (EXEYX) isn't well-known, but is an efficient fund run by a personal money-management firm that can invest in any size stock or exchange-traded fund. It avoids trouble and has below-average risk. Three-year annualized return is 17 percent.
-- Selected American Shares "S" (SLASX) is a large-cap growth and value fund that can be an anchor for an individual's portfolio. Favoring the financial sector, its management team invests sensibly and is shareholder friendly. It is a go-to pick for U.S. equities. Three-year annualized return is 14 percent.
-- Dodge & Cox International Stock Fund (DODFX), so long as it remains open (there has been talk it might close to new investment), is a successful large-cap value fund with low costs that is shareholder friendly. Three-year annualized return is 27 percent.
-- Vanguard Target Retirement 2025 Fund (VTTVX), one example of that firm's target choices that aim toward a specific year, invests in Vanguard's Total Stock Market, European Stock Index, Pacific Stock Index, Emerging Markets Stock Index and Total Bond Market Index funds. Three-year annualized return of 12 percent. Morningstar's favorite target-date funds are from Vanguard and T. Rowe Price.
-- Fidelity Spartan Total Market Index Fund (FSTMX) is a broad index fund that is attractively priced with a focus on large- and mid-cap domestic shares. Benz notes that choosing several index funds such as this one gives the investor control over asset allocation. Three-year annualized return of 14 percent.
Lowell's recommendations represent one fund family, but his investment mix could hold true for any fund group: -- Fidelity Dividend Growth Fund (FDGFX), a large-cap growth and value fund, is an anchor that is outstanding at picking defensive stocks. It concentrates on health-care stocks but also financial, technology and consumer names. Its multinational holdings provide growth. Three-year annualized return is 11 percent.
-- Fidelity International Discovery (FIGRX) is a diversified large-cap international fund that carefully dissects the fundamentals of companies in which it invests. It concentrates in Japan, Germany, France, the United Kingdom, Switzerland, Australia and Spain. It rarely has more than 15 percent of total assets in its top stocks. Three-year annualized return of 24 percent.
-- Fidelity Leveraged Company Stock Fund (FLVCX) concentrates on small- to large-cap stocks of companies you'd find in a junk bond fund, so it is not without volatility or risk. Nonetheless, it has a remarkable track record of defending assets in downdrafts and gaining twice as much as its benchmark (the Leveraged Equity Index) in market revivals. Three-year annualized return is 26 percent.
-- Fidelity International Small Cap Opportunity (FSCOX), launched in 2005, it has experienced management that concentrates on small- and mid-cap names in established markets such as Europe, Japan and the Pacific Rim. It discovers the least-followed names, and its superior knowledge boosts performance. One-year return is 33 percent.
Andrew Leckey is a Tribune Media Services columnist.
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