THE MONEY 50 BLOCK 1 2 3 MIDCAP Supplement your core ... · Fidelity High Income (SPHIX) HIGH YIELD 0.72 1.8 8.5 2,500 Vanguard Interm.-Term Tax-Exempt (VWITX) MUNI NATL. INTERMEDIATE

Securing your INCOME

LastMake Your

Dough

There are ways to guarantee you won’t run out of income, regardless of what the market does next—

but you’ll have to MAKE SOME TRADEOFFS to do so.

and Last…and Last

by Walter Updegrave

EXCERPT

(#84225) MONEY is a registered trademark of Time Inc. ©2015 Time Inc. MONEY and Time Inc. are not affiliated with, and do not endorse products or services of, the Licensee of this reprint. For more information about reprints from MONEY, visit PARS International Corp. at www.moneyreprints.com.

INVE STOR’S GUIDE 2015

P A R T 3 » T H E T O O L S

104 m o n e y. c o m J A N U A R Y/ F E B R U A R Y 2 0 1 5


P A R T 3 » T H E P L A Y B O O K

THE MONEY 50USE OUR LIST OF RECOMMENDED MUTUAL AND EXCHANGE-TRADED FUNDS TO CONSTRUCT A PORTFOLIO THAT’S BUILT TO LAST.

BUILDING- BLOCK FUNDSThese funds and ETFs, which offer you expo-sure to big chunks of the stock and bond mar-kets, should be used for the core part of your portfolio that you’ll hold on to for years. Because you’re seeking broad market exposure, low-cost diversified index funds are your best bet.

ONE-DECISION FUNDSDon’t want to put together a portfolio on your own? Then use one of these pro-fessionally managed funds that hold a diversified mix of stocks and bonds.

NOTES: 1Net prospectus expense ratios were used. 2Total return figures are as of Dec. 8. 3Five-year returns are annualized. 44.25% sales load. 5Shares available only through fund company.ETFs do not have a minimum initial investment. N.A.: Not available. SOURCES: Lipper and fund companies

Fidelity Balanced (FBALX) BALANCED 0.56 10.1 12.0 2,500

Vanguard Wellington (VWELX) 0.26 10.1 11.5 3,000

T. Rowe Price Retirement Funds (STOCKS/BONDS) TARGET DATE

Example: 2020 Fund (TRRBX) 64%/36% 0.67 6.0 10.7 2,500

Vanguard Target Retirement (STOCKS/BONDS)

Example: 2035 Fund (VTTHX) 83%/17% 0.18 7.4 11.8 1,000

ANNUAL MINIMUMEXPENSES INITIAL

FUND NAME (TICKER) STYLE (% OF ASSETS)1 20142 FIVE YEARS3 INVESTMENT

LARGE-CAP

Schwab S&P 500 Index (SWPPX) BLEND 0.09 13.5 15.9 $100

Schwab Total Stock Market Index (SWTSX) 0.09 11.9 16.2 100

MIDCAP/SMALL-CAP

iShares Core S&P Mid-Cap ETF (IJH) 0.14 8.1 17.1 N.A.

iShares Core S&P Small-Cap ETF (IJR) 0.14 2.4 17.7 N.A.

FOREIGN

Fidelity Spartan International (FSIIX) LARGE BLEND 0.20 –2.6 6.1 2,500

Vanguard Total International Stock (VGTSX) 0.22 –2.1 5.0 3,000

Vanguard FTSE All-World ex-U.S. Sm.-Cap (VFSVX) SMALL/MID BLEND 0.40 –4.4 6.6 3,000

Vanguard Emerging Markets Stock (VEIEX) EMERGING MARKETS 0.33 2.2 2.6 3,000

SPECIALTY

Vanguard REIT Index (VGSIX) REAL ESTATE 0.24 28.4 17.6 3,000

BOND

Vanguard Total Bond Market Index (VBMFX) INTERMEDIATE TERM 0.20 5.3 3.9 3,000

Vanguard Short-Term Bond Index (VBISX) SHORT TERM 0.20 1.2 1.8 3,000

Vanguard Inflation-Protected Securities (VIPSX) INFLATION-PROTECTED 0.20 3.8 3.8 3,000

Vanguard S/T Inflation-Protected Sec. ETF (VTIP) 0.10 –0.6 N.A. N.A.

Vanguard Total International Bond Index (VTIBX) WORLD 0.23 7.9 N.A. 3,000

% TOTAL RETURN

THE MONEY 50THE MONEY 50

J A N U A R Y/ F E B R U A R Y 2 0 1 5 m o n e y. c o m 105

LARGE-CAPInvests in shares of firms with stock market values, or market capitalizations, of $10 billion or more

SMALL-CAP and MIDCAPInvest in smaller companies

SPECIALTY Invests in assets that don’t move in sync with the broad stock or bond market

TARGET DATEProvides exposure to a mix of stocks and bonds appropriate for your age—and gradually grows more conservative over time

BALANCED Offers you exposure to a mix of stocks and bonds, but doesn’t grow more conservative over time

VALUE Looks for stocks that are selling at bargain prices

GROWTH Focuses on companies with fast-growing earnings

BLEND Owns both growth- and value-oriented stocks

SHORT TERM Owns bonds that mature in about two years or less

INTERMEDIATE TERMOwns bonds that mature in two to 10 years

MULTISECTORCan buy foreign or domestic bonds of any maturity

INFLATION-PROTECTEDOwns bonds whose value at least keeps pace with the consumer price index

FUND LINGO HOW TO READ THE TABLES

% TOTAL RETURN

CUSTOM FUNDS / Supplement your core holdings with these funds to give your portfolio a tilt toward certain kinds of stocks and bonds, diversify more broadly, or play a hunch.



LARGE-CAP

Dodge & Cox Stock (DODGX) VALUE 0.52 10.4 16.0 $2,500

PowerShares FTSE RAFI U.S. 1000 ETF (PRF) 0.39 11.6 16.4 N.A.

Sound Shore (SSHFX) 0.93 11.9 15.4 10,000

Primecap Odyssey Growth (POGRX) GROWTH 0.66 15.1 17.1 2,000

T. Rowe Price Blue Chip Growth (TRBCX) 0.74 9.6 17.7 2,500

MIDCAP

Delafield (DEFIX) VALUE 1.22 –6.0 11.9 1,000

Ariel Appreciation (CAAPX) BLEND 1.13 7.1 16.7 1,000

Weitz Hickory (WEHIX) 1.22 0.8 17.3 2,500

T. Rowe Price Div. Mid-Cap Growth (PRDMX) GROWTH 0.91 10.1 17.1 2,500

SMALL-CAP

Royce Opportunity (RYPNX) VALUE 1.17 –4.1 15.7 2,000

Vanguard Small-Cap Value ETF (VBR) 0.09 8.3 17.0 N.A.

Berwyn (BERWX) BLEND 1.20 –7.6 14.9 3,000

Wasatch Small Cap Growth5 (WAAEX) GROWTH 1.24 0.0 15.5 2,000

SPECIALTY

PowerShares Intl. Div. Achievers ETF (PID) DIVIDEND 0.54 –0.3 8.4 N.A.

SPDR S&P Dividend ETF (SDY) 0.35 13.1 15.8 N.A.

Cohen & Steers Realty (CSRSX) REAL ESTATE 0.97 28.4 16.9 10,000

SPDR Dow Jones Intl. Real Estate ETF (RWX) 0.59 5.7 9.9 N.A.

iShares North American Nat. Res. ETF (IGE) NATURAL RESOURCES 0.48 –13.1 4.2 N.A.

FOREIGN

Dodge & Cox International Stock (DODFX) FOREIGN LARGE BLEND 0.64 3.3 8.8 2,500

Oakmark International5 (OAKIX) 0.98 –2.6 10.6 1,000

Vanguard International Growth (VWIGX) FOREIGN LARGE GROWTH 0.48 –2.7 7.7 3,000

T. Rowe Price Emerging Mkts. Stock (PRMSX) EMERGING MARKETS 1.25 3.0 2.9 2,500

BOND

Dodge & Cox Income (DODIX) INTERMEDIATE TERM 0.43 5.4 5.1 2,500

Fidelity Total Bond (FTBFX) 0.45 5.3 5.3 2,500

Vanguard S/T Investment Grade (VFSTX) SHORT TERM 0.20 1.7 2.8 3,000

iShares iBoxx $ Inv. Grade Corp. Bond (LQD) CORPORATE 0.15 7.9 6.8 N.A.

Loomis Sayles Bond (LSBRX) MULTISECTOR 0.92 4.9 8.5 2,500

Fidelity High Income (SPHIX) HIGH YIELD 0.72 1.8 8.5 2,500

Vanguard Interm.-Term Tax-Exempt (VWITX) MUNI NATL. INTERMEDIATE 0.20 6.9 4.4 3,000

Vanguard Limited-Term Tax-Exempt (VMLTX) MUNI NATL. SHORT 0.20 1.9 1.9 3,000

Templeton Global Bond4 (TPINX) WORLD 0.88 2.7 6.1 1,000

Fidelity New Markets Income (FNMIX) EMERGING MARKETS 0.86 5.7 7.4 2,500


















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block and custom. The former com-prises 14 low-fee index funds—both traditional mutual funds and ETFs that you buy and sell like stock—that closely track market bench-marks such as the S&P 500; select among these for your core holdings. Most of the remaining entries let you augment that core with alter-native investments such as real estate or natural resources, or tilt your portfolio toward asset classes that tend to outperform the market over the long run, such as the stocks of smaller companies or “value” stocks that are cheap rela-tive to their earnings per share.

For actively managed funds, we focus on managers who have long tenure, who post above-average long-term performance records, and whose funds are owned by companies that treat shareholders right. We also include two target retirement-date fund offerings if you want to keep your money in a single investment that grows more conservative as you get older.

CHANGES TO THE LIST

WHILE WE ARE cautious about mak-ing switches, events can force our hand. We are replacing three funds:

Out: T. Rowe Price Equity Income(PRFDX) Longtime manager Brian Rogers is stepping down in October. His successor, John Linehan, has a wealth of experience, so sharehold-ers needn’t sell. That said, the fund’s stellar record belongs to Rogers.

In: Dodge & Cox Stock (DODGX) The

management team has delivered impressive returns at low cost, beating 99%, 92%, and 67% of their peers over the past three, five, and


10 years, respectively. The fund watchers at Morningstar give Dodge & Cox an “A” for how it treats shareholders, taking into account fees, disclosures, manager compen-sation, and other factors.

Dodge & Cox Stock is a true value fund, meaning the managers look for unpopular stocks and hang on, expecting investors to come around and bid share prices up.

“You have to understand the firm’s strategy and be willing to hold on,” says Morningstar analyst Laura Lallos. For instance, bat-tered computer giant Hewlett-Packard is the fund’s top holding, and the nine-person management team has other big technology bets, including one on Microsoft. A recent success: buying J.P. Mor-gan Chase after news of the Lon-don Whale trading scandal in 2012. The stock has risen almost 70% since then. That said, the fund fared poorly during the financial crisis. But over the years it has bested the market in up months and lost less in down months.

Out: Primecap Odyssey Aggressive Growth (POAGX) After posting top returns for a decade and seeing an influx of money, the fund closed to new investors. That’s a positive for shareholders as management de-cided to go with its best ideas rather than find ways to deploy more cash.

In: iShares iBoxx $ Investment Grade Corporate Bond (LQD) Instead of replacing Primecap with an-other stock fund, we bulked up our fixed-income selection at a time when Treasuries, the go-to bond investment, pay so little.

Low-fee LQD buys the debt of



HOW TO USE THE MONEY 5O

1. SEEK BROAD DIVERSIFICATION

With a few building-block funds, you can cover all the core asset classes.

SCHWAB TOTAL STOCK

MARKET INDEX

30%

VANGUARD TOTAL INTL. BOND INDEX

10%

VANGUARD TOTAL BOND MARKET INDEX

30%

VANGUARD TOTAL INTL.

STOCK INDEX

20%VANGUARD REIT INDEX

10%

2. TILT YOUR PORTFOLIO

Add “custom” funds such as small and value-oriented stocks.

3. OR SEEK HELP

Use a “one-decision” fund for professional diversification and portfolio management.

T. ROWE PRICE RETIREMENT 2020

100%

VANGUARD TOTAL INTL.

STOCK INDEX

15%

SCHWAB TOTAL

STOCK MARKET

INDEX

25%

VANGUARD REIT INDEX

10%

VANGUARD TOTAL INTL. BOND INDEX

10%

VANGUARD TOTAL BOND MARKET INDEX

30%

VANGUARD SMALL-CAP VALUE ETF

5%

POWERSHARES FTSE RAFI U.S. 1000

5%

THE MONEY 50

such household names as Verizon, Goldman Sachs, and General Elec-tric and has outperformed its peers. While blue-chip debtors are un-likely to default, corporate bonds are more volatile than Treasuries, so this fund should supplement, not replace, your core bond holding.

Out: Harbor Bond (HABDX) Why? In a name, Bill Gross. The co-founder of Pimco left the bond giant in the fall for Janus. Investors have been pulling money from Harbor, a sister fund to Pimco Total Return, as Gross’s recent bets against Trea-suries failed to pay off. Harbor has trailed 72% of its peers over the past 12 months, although the fund has a solid long-term record. Still, given management uncertainty at Pimco, we replaced Harbor.

In: Fidelity Total Bond Fund (FTBFX)An experienced team led by Ford O’Neil has given investors a smooth ride at a lower cost than Harbor. The fund can invest up to 20% of its assets in non-investment-grade debt. Those “junk” holdings are

one-seventh of the portfolio now. The idea is to add yield without sig-nificantly increasing risk.

FUNDS UNDERREVIEW

WHILE WE SEEK out portfolios that beat their average competitor over five years, we don’t immediately eject funds on the list should re-turns lag. Contrarian-minded man-agers can post subpar results before the market vindicates their think-ing. That said, continued under-performance bears scrutiny. We’re watching the following funds:

DELAFIELD (DEFIX) Managers J. Den-nis Delafield and Vincent Sellec-chia have whipped the average competitor that invests in midsize value stocks by 2.5 percentage points a year since 1999, but they’ve struggled the past two years, in part due to large holdings in indus-trials and basic materials, sectors

that have lagged the broader mar-ket. Still, Delafield has finished in the top 15% of similar funds in three of the past six years.

WEITZ HICKORY (WEHIX) Run by Oma-ha’s second-most-famous value investor, Wally Weitz, this fund has trailed competitors badly over the past three- and 10-year peri-ods, thanks to performance lag-gards such as security firm ADT. Plus, a large cash allocation meant Weitz didn’t fully capitalize on the bull market. Nevertheless, the fund ranks in the top 13% of peers over the past five years.

WA S AT C H S M A L L C A P G R O W T H (WAAEX) Jeff Cardon, the manager since 1986, tries to find companies that have low levels of debt and can double their earnings in five years. While the fund’s 15-year record is impressive, Wasatch has trailed al-most 60% of its peers over the past five years, thanks in part to its bet on energy stocks, which have fallen as oil prices decline.


THE MONEY 50

MAKING OF THE MONEY 5O

MONEY looks for solid long-term performers with these important traits:

NOTE: For funds that do not receive any stewardship grade from Morningstar, MONEY relies on its own assessment. SOURCE: Morningstar

You want fund managers who put shareholders first. We use Morningstar

stewardship grades as a guide.

STRONG STEWARDSHIP

Below-average expense ratios are a good predictor of better-than-average performance.

LOW FEES

0.94%Average expenses for actively managed MONEY 50 funds

1.33%Average stock fund

Good returns don’t mean much if the manager responsible for them is no longer around.

LONG TENURE

12.4 yearsAverage tenure for a MONEY 50 manager

5.5 yearsFor all funds

Actively managed MONEY 50 funds graded A or B 64%

All actively managed stock funds graded that high13%


















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Documents

THE MONEY 50 BLOCK 1 2 3 MIDCAP Supplement your core ... · Fidelity High Income (SPHIX) HIGH YIELD 0.72 1.8 8.5 2,500 Vanguard Interm.-Term Tax-Exempt (VWITX) MUNI NATL. INTERMEDIATE