Key Takeaways
- How to tell if you’re really a long-term investor or just a complacent one.
- Why investors should use mutual funds and ETFs as core portfolio holdings rather than stocks.
- Best practices for portfolio construction—and which asset classes you do and don’t need for a diversified portfolio.
- What international stocks can add to your portfolio mix.
- Which types of bonds to buy and which ones to avoid.
- Top mutual funds and ETFs to consider for your portfolio.
In this bonus episode of The Morning Filter podcast, co-host Susan Dziubinski talks with Morningstar’s Director of Personal Finance and Retirement Planning Christine Benz. They touch on whether investors are blind to market risk today or if they’re simply thinking long-term. They spend most of their time discussing portfolio construction—specifically, which asset classes to own, what role international stocks can play, and the types of bonds that work best for most investors.
Benz shares some of her favorite funds and exchange-traded funds to include in an investment portfolio. They close with some rapid-fire questions about how to invest an IRA that’s sitting in cash, whether time horizon or risk tolerance is a more important consideration when constructing a portfolio, and the most underrated investment strategy today.
Have an idea for a bonus episode? Send it to themorningfilter@morningstar.com.
Transcript
Susan Dziubinski: Hello, I’m Susan Dziubinski. Welcome to a bonus episode of The Morning Filter podcast. As our regular viewers and listeners know, we’re doing some bonus episodes of the podcast. If you have an idea for a bonus episode, send it to us via our email address, which is themorningfilter@morningstar.com. On today’s bonus episode, we’re going to cover several topics that those of you who took our recent The Morning Filter survey told us you wanted to hear more about. Those topics include portfolio construction, international stock investing, and bonds and bond funds. Joining me today to tackle those topics is my colleague Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning. She’s also co-host of The Long View podcast and author of the book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Christine and I are having our conversation on April 8. Welcome back to The Morning Filter, Christine.
Christine Benz: Susan, it’s great to see you.
Dziubinski: Thank you for being here. You were a guest on the podcast about eight months ago. It was August, I think, of 2025. At that time, I asked you what you thought the biggest risk was in the market at that point in time. You said investor complacency. Let’s fast forward to today, which is April 2026. You still think complacency is an issue?
Benz: Probably less so because volatility recently, or really going on all this spring, has shaken a lot of people up. When we look at fund flows, I’m seeing signs that maybe complacency is being dislodged a little bit. We’re seeing really good flows into fixed income. It appears that investors are taking good advantage of the higher fixed income yields on offer today, which I think is a plus.
Fixed income, of course, takes some volatility out of your portfolio. If you have higher yields, as we do today, that sets you up for better returns from fixed income going forward. You just have a better knowable source of returns in your portfolio. I’m happy to see that investors, probably driven by advisors, are swapping into fixed income, probably taking some equity risk off the table. We’re also seeing a lot of interest in international equity investing in the wake of a terrific run of results in 2025. We’re seeing strong flows into international equity as well as international fixed income and non-dollar-denominated fixed income, which has seen strong flows because the dollar has generally had a tough go of it recently, and that embellishes the case for non-dollar-denominated bonds.
Dziubinski: If I’m an investor, how can I tell if I’m actually being a long-term investor or thinking for the long-term versus being complacent? What’s the difference?
Benz: It’s such an important question, Susan. Yes, you absolutely do want to maintain a long-term mindset, but you don’t want to confuse that with never doing anything. In particular, you need to pay attention to a couple of key things when determining whether changes are in order. One is your situation. Are you getting closer to retirement? Do you need to take some risk off the table? If you’re under 50, I would say, no, the answer is probably not. You should stick with that globally diversified equity portfolio, but people hurtling toward retirement should be mindful of the need to derisk their portfolio and to help mitigate what’s called sequence risk, which is basically the risk of being clobbered by bad equity market returns right out of the box in retirement. Take stock of your own situation and how it’s changed, how your proximity to your goal date may have changed.
Naturally, the contents of our portfolio will shift a little bit during shipment. The net effect of that—because riskier assets, namely stocks, tend to go up more over long periods of time—our portfolios will tend to shift to be more aggressive, and that may not be what we want. In fact, if we’re derisking as retirement draws close, we probably want to take some risk out of the portfolio. Rebalancing and minding your own situation are the two things that should potentially cause you to make changes to your portfolio.
Dziubinski: So, that’s how you can sort of identify yourself. Am I really long-term, or am I complacent? Especially if I’m hitting that 50-year-old mark and I haven’t rebalanced for a while, and I haven’t actually touched my portfolio for a while—you, investor, are complacent. Fair?
Benz: I think so. I think particularly about the people who are hurtling toward retirement and also have their eye on delaying Social Security as a part of their retirement income stream, so they’ll be exclusively reliant on their portfolio in those early years of retirement. They may be inclined to retire today because their balances are probably plumped up a little bit, but you, in that situation with those higher withdrawals, are particularly vulnerable to sequence risk. Those would be the people whom I would call out to make sure that you aren’t being complacent, that you’re not sticking with that 90% equity weighting, that you should make room for some cash in your portfolio, as well as some high-quality fixed income investments.
Dziubinski: We’re going to talk a little bit about portfolio construction. That’s a great segue to this topic. Now, The Morning Filter’s audience is primarily comprised of people who are investing in individual stocks. But Dave Sekera, my co-host, even though he’s a stock guy, he does always say that when he’s talking about stocks to consider buying or selling, it’s always within the context of “This is not the core of your portfolio, though.” The core of your portfolio should be in some sort of managed products that match your goals and your risk tolerance. I know after years of talking with you, that’s your preference too. Talk a little bit about why the core of a portfolio is very well served, in general, by managed products.
Benz: I would take Dave’s advice even a step further and say, not only should the core of your portfolio be managed products, but the core of your portfolio should be index products, which people don’t naturally include under the managed umbrella, but they are a managed type of product. The idea there is that you’re gaining market exposure at a very low cost. Potentially, you could augment that with individual stocks, with actively managed funds. In fact, even in my model portfolios that are composed mainly of actively managed funds, I always include that backbone of total market index products, because in an environment like we’ve just come through with large growth dominating at the expense of everything else, you need to make sure that you have at least some exposure to other sectors in that portfolio. I’m with Dave on that idea of using the individual stock portfolio as kind of a completer portfolio.
There, you’re really leaning into what your self-identified strengths as an investor are. Maybe it’s being willing to have a really long time horizon with those positions. Maybe it’s having very low trading costs, so you’re not making many trades, and you’re maybe able to outperform actively managed investments in that way. I also think the idea of having more diffuse risks throughout the portfolio is a great way to express humility because when we look at the data, even on actively managed funds, with professionally paid money managers, it’s not that great, especially in the realm of large-cap stocks. As investors, I think it’s helpful to express humility in that same way by diversifying our exposures.
Dziubinski: Especially with the majority of your assets.
You mentioned your model portfolios. We call them sample portfolios on Morningstar.com, and we’re going to provide a link to them in the show notes. You have two main portfolio structures. You have portfolios you’ve developed for savers, and you have portfolio structures for people who are nearing retirement or in retirement. Talk a little bit about why you designed these portfolios. There are dozens of them, and we can’t talk about all of them today, but what was the impetus for this? What was the investor challenge you were trying to solve?
Benz: People are great investment collectors. I’ve found that they do a terrific job selecting investments. We have so many tools for them on Morningstar; so many data points that they can look at. That challenge is largely solved with all of the great data and analyses that we have. The idea of how to put together a portfolio, and how to change that portfolio as my proximity to my goals changes, is a harder lift for many people. The goal behind these portfolios was to do some illustrations of, here’s what a sane portfolio looks like in this situation for that person who is already in retirement or for that mid-career accumulator who wants to own mainly index funds. That was really the idea to showcase sensible portfolio structures and take something that is oftentimes kind of “black box,” which asset allocation is, and make it a little bit more tangible and easy to identify with.
Dziubinski: There are these two main buckets, for lack of a better word: the saver portfolios and the bucket portfolios for retirees. Let’s talk a little bit first about the saver portfolios, who you really designed these for, and who they’re not for.
Benz: These are for people who are saving for retirement, still accumulating and adding assets. They range from aggressive versions, which are geared toward people in their 20s and 30s, 90% plus equity allocations. They’re intermediate or moderate portfolios that are geared toward kind of midcareer savers. The more conservative versions are geared toward people who are getting quite close to retirement. The baseline asset allocations are built on what are called Morningstar’s Lifetime Allocation Indexes, which are a product of our index group here at Morningstar. They’re meant to be kind of target-date equivalent indexes. I use those to help guide the asset allocations. I do make some editorial decisions about categories to exclude, and I know we’re going to talk about that, but I don’t want these portfolios to have dozens of holdings. There are some assets that I just don’t include in the interest of not having so many funds, but I use those lifetime allocation indexes to guide the asset allocations.
I lean into our analyst’s output in terms of what their highest conviction mutual funds and exchange-traded funds are. I use their medalist funds, the highly rated funds, to populate the portfolios and confer with the analysts a little bit to get their input on what they think are the best active funds and fidelities line up, or whatever the case might be.
Dziubinski: Talk a little bit about the difference between those saver portfolios for investors who are in the accumulation phase versus your retirement bucket portfolios, which follow quite a different structure than those saver portfolios.
Benz: The Bucket approach is often called a time segmentation approach, but basically, you’re looking at your spending horizon and using that to determine how much risk to take with that segment of the portfolio. For my first couple of years of retirement, I would have a couple of years’ worth of cash set aside. I don’t want to have to change around my quality of life if the performance in the equity or bond markets isn’t great, so I have the cash holdings that I can draw upon, and then I’m stepping out a little bit on the risk spectrum from there. I’ve got the two years in cash holdings, maybe another five to eight years in high-quality fixed-income holdings, perhaps even a dash of dividend-paying stock exposure with that portion of the portfolio. It’s not a guaranteed return over that time horizon, but if you have a time horizon of say seven to 10 years, high-quality fixed income is a pretty good bet. With the remainder of the portfolio, that’s my risk portfolio. That’s where I will hold mainly globally diversified equities. If I have any high-risk other assets, whether precious metals, commodities, or junk bonds, I would hold them in that bucket with a nice long time horizon. All of these bucket portfolios are built on that same basic system. The reason I like it, which I should have said at the beginning, is that I think it works behaviorally. I’ve heard from so many older adults who say that they’ve used this general framework to guide how they’ve allocated their portfolios, and it gives them a lot of peace of mind.
Say you’re a new retiree here in 2026, with some volatility going on in the market. If you know that you have your living expenses set aside in truly safe investments that are yielding 4.0% or 4.5% today, that gives you peace of mind with those long-term portfolio constituents. I think it makes sense from an investment standpoint, and I think it works behaviorally.
Dziubinski: It’s just very logical, this concept of three buckets aligning with short-term goals, intermediate-term goals, which would be funding the seven to 10 year range, and then those longer-term goals that are going to be for later in your retirement or leaving an inheritance or legacy behind.
Benz: Exactly. I should point out, Susan, that in not every environment would you spend from that cash bucket necessarily. You might have some environments where maybe fixed income yields are really good, and those deliver all of your income needs, and you don’t need to touch that cash. Maybe equities have been great, and so you can reduce that equity exposure, bring the proceeds over to your living-expense bucket, and use that to fund your cash flows. You’re going to revisit where you’re going for cash on a year-to-year basis, but I think the Bucket system can be elegant in terms of providing a structure to carry you through your whole retirement.
Dziubinski: Sensible framework that you can tweak. Outside of those two main strategies, you’ve literally created dozens of substrategies. We can’t go through all of them, but can you talk about a few of them and why you created them?
Benz: The key fork in the road there is tax-deferred or tax-sheltered in some fashion, whether Roth or traditional IRAs, 401(k)s, those are managed without regard to tax efficiency on an ongoing basis. Then we have some tax-efficient portfolios as well that are meant to address investors’ taxable assets. As you might expect, they use municipal bonds for their fixed income exposures. They generally use broad-market index-tracking ETFs to reduce the tax drag on that portion of the portfolio. There are a lot of variations that address the different tax needs of investors depending on where they’re investing. There are also fund family-specific portfolios. Some people might be exclusively Vanguard investors and want to use the house brand of funds, or Fidelity, whatever the case might be. There are some house-brand types of portfolios.
And, there are these minimalist portfolios, which I know you want to talk about, but those are skinnied-down versions of the asset-class exposures that are in the other portfolios.
Dziubinski: Let’s talk a little bit about those minimalist portfolios. One of the reasons that I like them, and then I want to talk about them specifically for The Morning Filter, is that they’re very simple and they’re very straightforward. They include the basics. If you want to add on top of the basics, you can, which maybe The Morning Filter’s audience would want to, but this is the brass tacks of what you need. Talk a little bit about what those minimalist portfolios include and look like.
Benz: Yes. Hat tip, I should say, to Taylor Larimore, who was one of the founders of the Bogleheads group. Bogleheads often talk about this three-fund portfolio, and Taylor wrote a book about the three-fund portfolio, but it’s simply: total US market, total international stock, and total bond market index. With those three holdings, which are the underpinnings of my minimalist portfolios, you really do have a lot of diversification. You have the fixed income there, enlarged as you get closer to retirement. In my bucket minimalist portfolios, I’ve got a dash of cash exposure, but they really get you through a lot of different market environments, these three-fund holdings—or four funds if you bolt on some sort of money market fund. There are many different market environments that may come about, whether you’re saving for retirement or already retired, but the three or four-fund portfolio nicely addresses all of them.
Yes, there are a few asset classes that are on the cutting room floor. For retirement, especially, I would like people to make room for Treasury Inflation-Protected Securities, which you’re not going to find in a total bond market index. I also like them to hold a little bit of short-term bonds because in a year like 2022, you can’t say, “Hey, I need to sell a piece of you, but just give me my short-term bonds because they’ve done better.” It doesn’t work that way. If people want to augment, I would probably focus on those couple of additional asset classes, the inflation-protected bond and the short-term bond.
Dziubinski: Now, one thing that’s interesting about these minimalist portfolios is that, again, these are just the essentials. I guess what you’re kind of saying then, from an essential standpoint, you don’t necessarily need a distinct value fund or a distinct growth fund or a distinct small-cap fund or a distinct mid-cap fund. Talk a little bit about why you think that the three-fund minimalist approach gets you close enough, and that maybe it’s not worth it to sort of dabble in those other fund types.
Benz: It’s a great question, Susan. The key reason is that those different categories are reflected in your total market index. Are they there in exactly the proportion that you’d like to see? That’s an open question. I think there was a lot of good discussion around whether the US market, for example, had gotten a little bit too heavily influenced by those large growth stocks, but the smaller-cap and value stocks are there in your total market index. In some of the other portfolio model portfolios, there are discrete value and growth holdings for people who want to do a little bit more of that active type rebalancing. If you have those total market indexes, you are obtaining exposure to all of those other subcategories.
Dziubinski: You said a little earlier in our conversation that there are asset classes that get left intentionally on the cutting room floor that others would include in a model portfolio situation. Talk a little bit about some of those and why you think they aren’t necessary for everyone.
Benz: I mentioned commodities and gold or precious metals. Those categories actually look pretty good from the standpoint of diversifying a stock-bond portfolio. We work on this diversification landscape paper every year, and we’re in the midst of working on the 2026 release. Those categories look decent in terms of bringing something to the party. I was interested in, “Well, could we not have everything but the kitchen sink in the portfolio? Can we try to have fewer moving parts?” Those were a couple that I left out, even though they look pretty good from the standpoint of adding diversification. Real estate is another one that sometimes comes up. Maybe 15 or 20 years ago, having a discreet allocation to real estate was a must-have. But when we look at its correlation to the US market, what we see is that it doesn’t bring a lot.
R-squared, or correlation with the US market, is quite high today. If you own a total market index, you’re getting at least some exposure to real estate securities. That’s one that I don’t feel compelled to add, and I don’t feel particularly bad about having left out. Those are some of the key ones that people sometimes think about needing in a portfolio.
Dziubinski: Let’s talk about international stocks because that is one of your building blocks in the minimalist portfolios. It’s also something that The Morning Filter’s viewers and listeners have told us that they’d like to hear more about. First, from your perspective, what are international stocks really adding to a portfolio, Christine? Are they helping to damp risk? Is it just widening your opportunity set? Is there diversification value? What’s the value add?
Benz: Certainly, if you were to look back over the past 15 or so years, you’d really have to squint to see the case for non-US in a portfolio. There has been a slight risk reduction benefit to including non-US in a portfolio. I think the broadening opportunity set is probably the best case for adding non-US exposure. When you think about a year like 2025, you see that the reversal of fortune for non-US can happen very, very quickly. I don’t necessarily think that this is something you want to try to time your way into. I tend to think that the global market cap is a good guide to how much to hold in non-US. It’s been running in the range of 60% US, 40% non-US. It sometimes goes up or down, but I think that’s a good benchmark for investors when setting their own allocations.
A key thing that I think investors get with non-US exposure is that we are talking about how the US market has come to be so heavily influenced by the technology names. With non-US, you’re getting much more of a value bias in terms of the sector exposures. You’re getting much more in financials, basic materials, and industrials—sectors that were once really big in the US market, but are less so today. You’re getting a nice sort of ballast for your US equity portfolio. You’re getting securities that will probably do well in an environment when value does well.
Dziubinski: Some sector diversification. Now, I know you’re not a huge fan of tilting or tactical allocations, but if someone’s looking at international markets today, would you say that developed markets are more attractive, or the way to lean? Are developing markets, or emerging markets, more attractive? What’s your take on that?
Benz: Here again, I would tend to want to be kind of neutral on this question. I certainly wouldn’t want to exclude emerging markets.
Yes, their returns have not been great relative to developed markets. Certainly, over the past 10 or so years, they’ve dramatically underperformed. When we look at correlations, and again, getting back to that research paper that we’ve been working on, the case for emerging markets as being a really great diversifier for US equities comes through loud and clear. If you have some sort of total-market international portfolio, you’ll get the developed markets. I think no matter what your approach to international, you should have emerging markets.
Dziubinski: Christine, let’s talk a little bit about emerging markets, exposure, and retirees specifically. Emerging markets do tend to be more volatile than developed markets. Would you recommend that retirees have less exposure to emerging markets or not necessarily?
Benz: Here again, I think I would keep it neutral. Emerging markets are like 25% of a total international index today. They’re just 10% of a total world index today. 10% is not going to make or break your plan. I don’t know that retirees should go out of their way to reduce their exposure to emerging markets. I think they can stand pat with that market cap weighting.
Dziubinski: What about currency hedging when it comes to international investing?
Benz: I’m a fan of, within your international equity portfolio, maintaining unhedged exposure into whatever foreign currencies the securities are denominated in. It’s another source of diversification for investors. It can break one way or the other. In 2025, we saw non-US dollar currency diversification being very, very beneficial. There are other environments where that won’t be the case, but I would tend to think of it as another source of diversification, and equities are risky. It’s not going to add a huge additional layer of volatility to that sleeve of the portfolio. Fixed income, though, is where I would take an exception. In fact, I’m hearing a lot about non-dollar-denominated fixed-income investing. I’m less of a fan there. The reason is that the foreign currency fluctuations that you get with unhedged fixed income investments tend to make the bond act pretty equity-like, so you get swung around a lot by these foreign currency shifts, and that probably isn’t what you want as a bond investor.
You’re probably owning bonds to be a source of stability in your portfolio, or at least that’s why most of us own bonds. I think the case there for non-dollar-denominated bonds is a little less strong, in my opinion.
Dziubinski: When it comes to international stocks and your model portfolios, do you tend to favor passive strategies internationally, active strategies, or a little bit of both?
Benz: For the most part, I do tend to gravitate to the total market indexes because it’s just a great one-and-done solution for international equity exposure. Costs are super duper low. That’s a holding type that I come back to in a lot of these different portfolios. I do have, in some of the portfolios, more active exposures. Of course, there’d be more tracking error there. A fund that we’ve used as the core international holding is American Funds International Growth and Income IGAAX, which many people know of American Funds as being an advisor-sold firm, but you can buy some of these funds from the brokerage supermarkets without paying a sales charge. It’s a fund that the team likes a lot. I’ve also used Oakmark International Small Cap OAKEX in a couple of spots, a very volatile fund on a standalone basis, but one that does bring something to the party, especially for some of the more equity-heavy portfolios for the young accumulator types.
Dziubinski: Anything in particular from a sort of total international market fund?
Benz: So, iShares, BlackRock, Vanguard, Fidelity all run really great versions of those.
Dziubinski: Low costs.
Benz: Yeah. Just keep your eye on cost. Schwab does as well.
Dziubinski: Great. Let’s pivot over to bonds and bond funds, another topic of interest to The Morning Filter’s audience and another asset class that you think is really essential, as part of even a minimalist portfolio. You often say on Morningstar.com, and in other conversations we’ve had, that you feel that intermediate core bond funds, and maybe intermediate core bond-plus funds, are the best for most investors for that bond portion of their portfolio. Talk a little bit about why.
Benz: Right. This is not the return engine of your portfolio. In fact, I was looking at the total bond market over the past 15 years—like a 3% return, and surely inflation has gobbled up a portion of that return. But you’re looking for something that is going to be ballast for your equity portfolio in that equity market shock, whether it’s March of 2020 or some recessionary environment when stocks aren’t always bad, but often they aren’t great. That high-quality fixed-income sleeve is important. Here, I would look to the core intermediate term bond, maybe what’s called a core-plus intermediate term bond that has some latitude to dabble in some higher-yielding, lower-quality fixed income types. Those would be the core of someone’s fixed-income portfolio. If someone’s just kind of waking up and saying, “Hey, I’m 57, and I probably should get some of this stuff.” I’d start there.
Dziubinski: You mentioned that core-plus bond funds can dabble in lower quality, but what do you think of, say, multi-sector bond funds, which probably do more than dabble in lower quality, or let’s say global bond funds?
Benz: Multi-sector is going to be a grab bag of high-yield or junk bonds. They might own some non-dollar-denominated bonds. They might even own some stock some of the time. Those, I would relegate to that supporting player role in a portfolio, where that’s not my main bond holding. It’s going to perform probably more in sympathy with the equity market; when equities are down, it probably will hold up better, but may not look that great. I wouldn’t want to use it to supplant high-quality fixed income, even though the yield may be higher, and the long-term returns might look better. That’s a risk-on asset that I would use to augment the high-quality fixed-income assets.
Dziubinski: What about global bonds?
Benz: I think there’s a case for them. I haven’t included any dedicated global bonds in the portfolio, in part because by the time you include a currency-hedged product, the returns tend not to be that different from the US market. I don’t know that I’d go out of my way to add a dedicated global fixed-income fund.
Dziubinski: And, you are trying to keep these simple. You said there are other things you’ve left on the cutting room floor, and this is just one of those things, I guess, right?
Benz: Yes. I look at a product like Vanguard’s target-date series, and they do, very much, include that component of global bonds. I think it’s a reasonable thing to add, but in the interest of not having so many holdings, I’ve excluded it.
Dziubinski: We’ve been in an environment where interest rates have stayed higher for a little bit longer than people have expected. You said that’s good for investors for bonds because it’s sort of predictive of what your return may be going forward. But let’s say a year from now, interest rates are coming down, and investors want to start stretching for yield. Maybe they want to consider some lower-quality credits, or they want to extend their durations. What do you think of those tactical moves with your bond sleeve?
Benz: You could do it around the margins, but the thing I would keep in mind is to remember why yields are going down. It’s often because there’s some concern about the economy softening. The Federal Reserve is a little bit more accommodative in periods like that, where they want to make sure that the economy stays strong or doesn’t weaken. Oftentimes, when you’re chasing yield in an environment like that, you are leaning into risk at a time when you might not want to be taking it. All of those security types, or especially the higher-yielding, lower-quality fixed income types, will tend to be vulnerable in those weakening economic environments. I would do it around the margins of a portfolio to the extent that I did that at all, and stay mindful of economic conditions.
Dziubinski: You did mention inflation-protected bonds earlier in our conversation, specifically for those in retirement as part of the Bucket strategy. Talk a little bit about what role they play and why you think that’s very important for retirees.
Benz: When you’re working, you typically are earning some sort of cost-of-living adjustment in your paycheck. You probably don’t need to go out of your way to include inflation-protected bonds in your portfolio. You’re not spending from it yet, and stocks will be your best defense against inflation. Maybe you include a couple of categories like commodities, precious metals, or something like that. When you’re in retirement, it’s a different ball game because you’re extracting at least some of your cash flows from your portfolio, and some of those safer investments—which are important to own, like cash and bonds—will be vulnerable to inflation. That’s where dedicating a component of the portfolio to inflation-protected bonds can be really valuable because those bonds give you an inflation adjustment to help keep your purchasing power whole. That’s one reason why all of my bucket portfolios do include a component of inflation-protected bonds.
The fund I’ve used in a lot of the portfolios is Vanguard’s Short-Term Inflation-Protected Securities VTAPX. The reason I like that short-term product is that it tends not to pick up on a lot of the interest rate-related noise that can come along with intermediate-term bonds. It’s more or less a pure reflection of inflation, so that’s a nice fund to have in the toolkit. No matter where retirees are investing, I think having that inflation-protected bond exposure is important. They might also get it from I bonds. The issue with I bonds is that the purchase constraints limit you from being able to build a significant bulwark against inflation, but if you do so over a number of years, you should be able to get a nice defense going in I bonds as well.
Dziubinski: Lastly, on bonds, Christine, what are some of the other core bond funds or core bond-plus funds that find their way into your model portfolios?
Benz: One that I’ve used in a number of the portfolios, Susan, is an iShares fund. It’s called iShares Core Universal USD Bond IUSB. One reason I like it is that it does include a little dash of lower-quality bond exposure. It’s more holistic than some of the other total bond market indexes. Certainly, for investors who want to use the total bond market index, I think that’s a fine core fixed-income holding. We also use Fidelity Total Bond FTBFX in a number of the portfolios. That sounds like it’s an index fund, but it’s an active fund that our analysts like a lot. Fidelity Short-Term Bond FSHBX is another active fund that our analysts like. We’ve also used Fidelity’s muni funds in a number of the portfolios, as well as Vanguard’s muni funds. Vanguard Short-Term Bond Index VBIRX is another fund that we like and that I have used in a number of these portfolios.
Dziubinski: That sounds like a good collection right there. We’re going to close today with some rapid-fire questions. We did this last time, and I enjoyed it, so we’re doing it again. First rapid-fire question: Small-cap stocks look relatively undervalued still in today’s market, and they’ve done pretty well, relatively speaking. Dave often talks about small-cap stocks, but he also suggests that at the end of the day, you’re probably best served by getting small-cap exposure from a managed product like an exchange-traded fund or a mutual fund. Are there any small-cap funds in particular that you like?
Benz: A good one-and-done fund would be Vanguard Extended Market Index VEXAX, which will give you some mid-caps as well as small caps. For indexers, I think they can look there, especially if they’ve got their large caps coming from an S&P 500 type fund. Another fund I would call out, and its recent returns have not been anything to write home about, but I like the manager a lot, is Royce Special Equity RYSEX. It’s an actively managed fund that pays a lot of attention to balance sheets. It’s kind of an old-fashioned stock picker’s fund that tends to put safety first. It’s a fund that I really like, and we have long liked Royce’s management team.
Dziubinski: Next rapid fire. It’s tax time, so it’s a perfect time to be talking about this. I’ve added money to my IRA, but I haven’t invested it. How should I invest it today?
Benz: Look for the holes, see where you need to add to your asset class exposure. I think of my own situation. We had been light on international stocks in our portfolio, and specifically international value-oriented stocks. We added Vanguard International Value to our portfolios; both my husband and I have our IRAs in that fund. Look where you’ve got the bald spots in your portfolio and add to those areas. For a lot of investors, it’s probably fixed income today because they’re getting close to retirement, and an IRA is a terrific place to hold those fixed-income holdings because you’re not going to be taxed on those income distributions on a year-to-year basis.
Dziubinski: I’m constructing a portfolio. What matters more at the end of the day, my time horizon or my risk tolerance?
Benz: Risk tolerance should jump in the backseat. Time horizon should be driving the car. I think that it’s the most important consideration, where you’re looking at your proximity to needing your money. A lot of people sometimes think about age as a proxy for time horizon, and that may be with respect to your retirement portfolio, but chances are, even if you are a young person, you’ve got some near-dated funds. Make sure that you aren’t taking too much risk with those components of the portfolio. I think time horizon should really be a key determinant. We should be talking about it more in the realm of portfolio construction than we do.
Dziubinski: What is the most underrated investment or strategy today?
Benz: Can I have two?
Dziubinski: Sure.
Benz: When we look at TIPS bonds today, you can build a ladder of TIPS that exceeds, in terms of its return, what you could get from an allocated safe withdrawal rate. You can get well over 4% today with a laddered portfolio of Treasury Inflation-Protected Securities. You’re getting nice inflation insulation. For people who are getting close to retirement, I think that’s something that they ought to consider, not with their whole portfolio, but maybe they’re using the TIPS to help meet their fixed-income needs and using the TIPS to augment what they’re getting from Social Security. That’s a suggestion for people who are at that life stage, and I think it’s underrated. For people who have taxable assets who are still accumulating for retirement, a product I really like is Vanguard Tax Managed Balanced VTMFX. The reason is that it’s a stock-bond portfolio that rebalances, so it gets back to kind of a 50/50 allocation over time, but does so in a very tax-efficient way.
I’m surprised that there haven’t been more copycats of this fund because I think it’s really quite good at what it does, in terms of delivering that balanced stock bond exposure without a significant tax drag. That’s one I would look at for people’s taxable portfolios where they’re looking for kind of a one-and-done, low-maintenance solution.
Dziubinski: Christine, thank you so much for joining me today for this bonus episode. We appreciate your expertise, and I’m sure our listeners are going to really enjoy this, and we’ll have you back again soon.
Benz: Thank you so much, Susan.
Dziubinski: I hope you’ll join Dave Sekera and I every Monday for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. Happy investing.