Time To Revisit Fund Portfolios

4/19/2010


We adjusted our recommended fund portfolios in the March 29 issue, increasing their exposure to stocks. The Conservative Portfolio is about 71% stocks, compared to 65% prior to rebalancing. The Growth Portfolio is roughly 86% invested in stocks, up from 81%. New fund weights are shown below.

The market’s bullish primary trend dictates a more aggressive stance. But with diversified U.S. stock funds up 40% to 60% over the last 12 months, investors should pay close attention to their asset allocations, keeping the following suggestions in mind.

Don’t go overboard on stocks. Investors trying to win back lost money might be tempted to load up on stock funds, given their recent outsized gains. Resist the urge. By spreading your money among several asset classes, you can reduce risk without significantly crimping returns. Plus, a diversified portfolio will typically offer a smoother ride.

Standard deviation measures volatility, with a higher figure implying a wider range of performance. Based on monthly returns over the last three years, our Conservative Portfolio as currently constructed would have had an annualized standard deviation of 16.5%, versus 20.0% for the Growth Portfolio, 20.6% for the average large-company blend fund, and 25.4% for the average small-cap fund.

Recommendations: American Century Heritage ($18; TWHIX), which invests in midsize growth stocks, has started the year strong, gaining 12.1% through April 13. In contrast, Vanguard Dividend Growth ($14; VDIGX) has lagged, reflecting a limited exposure to rebounding financial stocks. Still, the fund ranks among the top 7% of its peer group based on five-year returns.

Don’t shun bonds. The March 15 issue of the Forecasts reviewed bonds and bond funds, including the factors that can affect their performance. While the total-return outlook for bonds does not match that of stocks, they make sense for many investors. Our Conservative Portfolio is about 24% invested in bonds, versus roughly 11% for the Growth Portfolio.

Bonds offer more dependable returns than stocks. According to Morningstar, intermediate-term government bonds posted positive returns in 75 of the last 84 years. In comparison, large-cap stocks generated gains in 60 periods.

Recommendation: Vanguard Total Bond Market ($10; VBMFX) is a solid all-weather pick. The fund, which seeks to replicate the return of the entire U.S. bond market as measured by the Barclays Aggregate Bond Index, yields about 3.2%.

Add foreign stocks to the mix. The MSCI EAFE Index, which includes stocks from Europe, Australasia, and the Far East, outperformed large-cap U.S. stocks in seven of the last 10 years. Foreign stocks represent more than one-half of the developed world’s investable equity opportunities, and they also help diversify portfolios that contain mostly U.S. stocks or funds.

Recommendation: A solid choice is Vanguard Total International Stock Index ($15; VGTSX). The fund, which offers exposure to European, Pacific, and emerging-market regions, ranks better than 97% of its peers based on our fund-ranking system.

 

FORECASTS FUND RECOMMENDATIONS
Through April 13, our recommended Growth Portfolio has gained 7.3% for the year, versus total returns of 6.8% for its benchmark portfolio and 8.0% for the S&P 500 Index. The Conservative Portfolio has returned 6.4%, versus 5.3% for its benchmark.
Year-
% of
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
American Century Heritage
($18; TWHIX)
12.1
A
8
9
93
Dreyfus Small Cap Stock
Index ($19; DISSX)
12.9
C
0
0
64
Fidelity Export & Multinational
($21; FEXPX)
6.5
C
7
8
46
Fidelity Leveraged Co. Stock
($26; FLVCX)
12.3
C
0
0
66
Heartland Select Value
($28; HRSVX)
10.7
D
7
9
94
Heartland Value Plus
($27; HRVIX)
13.8
C
8
9
92
T. Rowe Price Int’l Discovery
($39; PRIDX)
5.5
D
5
6
89
T. Rowe Price New Horizons
($29; PRNHX)
12.5
B
8
9
92
Vanguard 500 Index
($110; VFINX)
7.9
B
5
5
59
Vanguard Dividend Growth
($14; VDIGX)
4.8
E
8
9
98
Vanguard Emerging Mkts.
Stock Indx. ($27; VEIEX)
5.3
C
0
5
91
Vanguard GNMA ($11; VFIIX)
2.3
B
5
0
91
Vanguard Inter.-Term Tax
Exempt ($13; VWITX)
1.0
D
0
0
77
Vanguard International Value
($32; VTRIX)
3.6
C
8
6
98
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
2.2
A
0
0
85
Vanguard Total Bond Mkt.
Index ($10; VBMFX)
1.9
E
15
0
67
Vanguard Total Int’l Stock
Index ($15; VGTSX)
4.0
B
6
6
98
Vanguard Wellesley Income
($21; VWINX)
4.0
D
0
6
92
Vanguard Wellington
($30; VWELX)
5.2
D
5
8
98
Wells Fargo Advantage High
Income ($7; STHYX)
3.9
E
5
5
39
* Year-to-date ranks through April 13 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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