A “No-Brainer” Fund Portfolio

08/29/2007 12:00 am EST


Thurman Smith

Editor, Equity Fund Outlook

Thurman Smith, edtor of Equity Fund Outlook, shows you how to “set it and forget it” in your mutual fund investments.

Say you wanted to just stash some assets in a few funds and throw away the key, at least for part of your taxable portfolio.

[Here are] some buy-and-hold candidates are shown based on a very low risk exposure combined with a market-beating performance since the 2000 high and a current buyable rating.

Ideally, the best buy-and-holds are index funds. But why settle for a market return? For the domestic market the best bet is low-expense Vanguard Value Index (VIVAX), which returned 11.6% annualized since inception in late 1992.

In contrast, the corresponding Growth Index fund returned only 9.5% and the Vanguard Total Stock Market Index fund returned, as one might expect, the average of the two, or 10.6%. Value Index is also tax efficient, so any investor can use it. The only requirement to hold the fund is to recognize that in a period when large growth stocks are predominating, Value Index will lag. But for this long-term strategy, one just waits that out.

As for index funds to take advantage of the long-term advantage of small and mid-cap value, there is Vanguard Small Cap Value Index (VISVX). This fund no longer tracks the Russell 2000 [Value Index of smaller firms], but the MSCI US Small Value index. Vanguard Mid Cap Value Index (VMVIX) also follows the MSCI index of this subset.

For one’s domestic division of a buy-and-hold portfolio, consider a 50% position in large-cap weighted Vanguard Value Index and 25% each in Small Cap Value and Mid Cap Value. This allocation would nudge towards the more rewarding capitalization subsets of value while reducing overall volatility.

There is no value foreign stock index fund of which I am aware. Vanguard Total International Stock Market Index (VGSTX) covers all foreign markets except Canada by investing in their Europe, Pacific, and Emerging Markets funds. A cleaner approach is with the new Vanguard FTSE All-World Ex-US (VFWIX) fund, which is based on a Financial Times index that includes Canada. Vanguard Total International Stock Market Index is tax efficient; the tax efficiency of VFWIX is as yet unknown.

A tax-advantaged buy-and-hold account could also consider the actively managed Vanguard International Value (VTRIX), which has well outperformed the index over the last 11 years and three months.

There are now three firms running parts of this fund, the most recent of which, Lazard, was brought in last year. Alliance Bernstein was added in 2004, and Hansberger Global has been on board since 2000. Conservative buy-and-hold investors could consider a 15% weighting in the foreign camp; more aggressive investors might go as high as 25%.

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