Kiplinger article

2-18-08
Invest in funds that seek growth stocks as well as those that specialize in value stocks. This is a good strategy because, just like big-company and small-company stocks, growth and value stocks tend to rise and fall at different times. Growth companies are typically those with rapidly accelerating sales and profits, while value stocks are considered cheap relative to their peers. Don't forget to make room for a fund that invests in foreign stocks. Because foreign stocks don't typically move in lock step with U.S. stocks, giving your portfolio some foreign flavor adds more diversification.

Foreign stocks are especially important these days because the growth of many overseas economies is dwarfing growth of the U.S. economy. Stock prices tend to reflect such growth. The Morgan Stanley EAFE (Europe, Australasia and Far East) index has returned an annualized 24% the past five years, versus 12% for the U.S. equivalent, Standard & Poor's 500-stock index.

Model portfolios

Long-term: 10+ years away
Let compounding work its magic for you as you save for long-range goals, such as retirement. We've assembled an all-stock portfolio with a nice blend of growth and value funds, and large-, midsize- and small-company funds. Foreign stocks get 25% of the money, including 5% in an emerging-markets fund. For further diversification, you might want to add a slug of real estate investments. Consider taking 5% from Dodge & Cox International Stock and putting it in Fidelity International Real Estate (FIREX), which is up an annualized 19% over the past three years.

20% Selected American Shares (SLASX/Large-cap value)
15% Marsico 21st Century (MXXIX/Large-cap growth)
15% Bridgeway Aggressive Investors 2 (BRAIX/All-cap growth)
15% Excelsior Value & Restructuring (UMBIX/Large-cap value)
10% Baron Small Cap (BSCFX/Small-cap growth)
20% Dodge & Cox International Stock (DODFX/International)
5% T. Rowe Price Emerging Markets (PRMSX/International)


Medium-term: 5 to 10 years
You're getting closer to your goal—be it retirement, paying for college or fulfilling some other large call on cash—so we've reduced the risk of this portfolio by allocating 30% to a bond fund, which should help your portfolio achieve smoother performance. Otherwise, we prescribe a diversified stock portfolio with healthy portions of small-, midsize- and large-company stocks.

Differences
30% Loomis Sayles Bond* (LSBRX/Global corp.)
5% T. Rowe Price Emerging Markets (PRMSX/International)
* In a taxable account, use Fidelity Spartan Intermediate Municipal Income (FLTMX) instead.


Short-term: Fewer than 5 years
You need to think more in terms of preservation of capital and current income at this stage, so we've bumped up the weighting in bond funds to 40%, split among three funds with very different strategies. But too many people invest too conservatively when they retire, running the risk of outliving their savings. So we've maintained a 60% position in stock funds.

Differences
20% Loomis Sayles Bond* (LSBRX/Global corp.)
10% Dodge & Cox Income (DODIX/Intermediate-term corp.)
10% Fidelity Floating Rate High Income (FFRHX/High-yield corp.)

Thoughts: I like this approach of keeping the short term / conservative allocations still mostly stock weighted due to the tendancy of a well managed fund to perserve value. I also like the cap blend that pervades all these portfolios; I think this is necessary to utilize the growth potential of the market through all seasons. This parallels tightly the growth/value blend as well. I agree that foreign markets are booming but don't underplay the connection between the US economy and the world markets. Many US based companies are still heavily invested in foreign markets so the traditional US large cap has more foreign exposure inherent than I feel most analyists consider.