Three Simple, Stellar Portfolios

published 10 March 2010

You have to hand it to Burton Malkiel. A year ago we asked the Princeton professor and two other experts to suggest simple, low-cost portfolios that relied heavily to exclusively on index funds. The idea was to show that you don’t have to use fancy investments to earn a good return. The results are in, and Malkiel thumped the market. From the beginning of the simple-portfolios project on January 1, 2009, through February 28, his portfolio advanced 40% -- well ahead of the 26% return of Standard & Poor’s 500-stock index for that period.

A healthy allotment to foreign stocks, particularly those from emerging markets, helped goose Malkiel’s gains. Leading the way were 10% stakes in both Matthews India (symbol MINDX), a regular open-end mutual fund, and Templeton Dragon (TDF), a closed-end fund (one that issues a fixed number of shares and trades like a stock). The funds soared 95% and 51%, respectively.

Malkiel says he chose these funds, both of which are actively managed, because he saw them as the best way to play China and India. Those countries, in his view, are likely to remain among the world’s fastest-growing economies. He chose the Templeton fund specifically because a year ago it traded at a big discount to the value of its underlying assets. As of the March 8 close, with the shares at $25.54, the fund traded at a 10.8% discount to net asset value per share.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Larkin believes that the global economy will improve in 2010 and that the Federal Reserve will start to increase short-term interest rates later this year. As a result, he’s making substantial changes to his income portfolio. In particular, he’s adding investments that he thinks will perform well in an environment of rising inflation. Alas, the changes stretch the concept of a simple portfolio. But starting in 2010, this is his new portfolio:

The portfolio of our third expert, Larry Swedroe, has roughly equaled the S&P 500’s gain, but it did so with less volatility thanks to a healthy stake in bonds. Swedroe is director of research for St. Louis-based Buckingham Asset Management and author of several useful books, including The Successful Investor Today (St. Martin’s Griffin, $16) and The Only Guide to a Winning Investment Strategy You'll Ever Need (St. Martin’s Press, $26).

The portion in the REIT index fund gained a healthy 30%. A few of my colleagues at Kiplinger’s rolled their eyes when I included real estate in my portfolio a year ago, given the drubbing the sector had taken before and during the financial crisis. But the point of crafting a simple portfolio, in my view, is to build a diversified investment plan that you stick with through good times and bad. You don’t try to time the market if you want to keep your investments simple. Now the argument is being made that real estate investment trusts are overvalued (see my colleague Jeff Kosnett’s column, Growing Risk in REITs). But I repeat: You stick with the key elements of a simple portfolio in good times and bad.

That doesn’t mean you can’t tweak your portfolio. I’m making one small change. As of March 1, I’m reducing the allocation to Vanguard 500 Index, which tracks the S&P 500, from 25% to 20% and moving the freed-up cash into Vanguard Emerging Markets Stock Index. Given the fund’s 67% gain over the past 14 months, I don’t expect big gains this year. However, it’s clear that developing nations are growing much faster than the developed world, and over time, that should translate into better stock returns in emerging markets. Here’s how our portfolio performed in the 14 months through February 28.