Three Simple, Successful Portfolios

published 12 July 2009

In January, Kiplinger's asked three experts to recommend simple mutual fund portfolios based primarily on low-cost index funds. We promised we'd update the portfolios at the six-month point, and true to our word, here are the results. Our simple portfolios fared from not bad to great.

Three Simple Portfolios Simple Plans to Beat the Market

Emerging markets, up an average of 34% through June, gave Malkiel's portfolio a big lift. Most of his portfolio was composed of three relatively tame index funds -- low-cost mutual funds that seek to mimic a market benchmark, such as the S&P 500. But he had significant positions in Templeton Dragon, an actively managed closed-end fund that gained 36%, and Matthews India, a regular mutual fund that soared 47%. He picked the Dragon because at the time it was trading at a big discount to the value of its underlying assets, and he saw the Matthews fund as the best way to play India. "I believe that of all the places in the world, China and India are the two that will have the highest growth rates," Malkiel says.

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He's sticking with those countries and with his portfolio. "I still think that emerging markets look very good," he says. China, he says, has already recovered from the collapse in exports and is growing again-perhaps at a 7% rate this year. He concedes that Chinese stocks may suffer a correction but says it's impossible to know when to jump in and out of markets, so investors need to learn to ride out the ups and downs.

Emerging-markets stocks also helped Larry Swedroe's portfolio. Swedroe, director of research for St. Louis-based Buckingham Asset Management and author of several useful books, including The Successful Investor Today and The Only Guide to a Winning Investment Strategy You'll Ever Need, put 4% of assets in the mutual fund version of Vanguard Emerging Markets, which jumped 34%. Also aiding his portfolio, which returned 7%, was a stake in iShares MSCI EAFE Small Cap Index, an ETF that tracks stocks of small, overseas companies.

We asked our third expert, William Larkin, fixed-income portfolio manager at Cabot Money Management, in Salem, Mass., to provide a fixed income-only portfolio. It also returned about 7%. Larkin is the only expert who elected to change the investments in his portfolio. He thinks rising inflation-or fear of rising inflation-will lead to higher interest rates. That would particularly hurt the value of iShares Barclays Aggregate Bond ETF, which tracks a broad index of high-quality U.S. bonds.

Until the inflation threat passes, he's splitting the 25% stake he previously held in the Aggregate Bond fund between two ETFs with bonds of shorter maturities. His two new picks are iShares Barclays 1-3 Year Credit Bond (symbol CSJ) and iShares Barclays Intermediate Credit Bond (CIU). "I think there's going to be some real volatility and change in the bond market," Larkin says. "Now is the time to embed your portfolio with some protection."

Full disclosure: We added our own picks to the simple portfolios story that appeared in the April issue of Kiplinger's Personal Finance magazine. Our package gained 5%, hurt by a lower allocation to emerging-markets stocks and an allotment to a real estate fund. But we're sticking to our guns. We expect the real estate market to come back eventually, and when it does, we believe our pick will deliver double-digit gains.

Rebalancing is a simple way to help you sell high and buy low. It effectively forces you to sell better-performing funds and replace them with laggards. In the case of my real estate funds, I was gradually taking profits when real estate stocks were booming in the middle of the decade (the Vanguard REIT index fund, for example, was up 30% in 2003, 2004 and 2006). This strategy served me well during the bear market.

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