With the decline of both stocks and bonds this year, some investors have come to question the worth of a diversified portfolio.
But diversification remains a valuable tool, says Russel Kinnel, director of manager research for Morningstar. Given the ups and downs of most every asset class, it’s very difficult to predict each year’s victor, he notes.
For example, from early 2020 until now commodities have been big winners, but from 2011 until 2020, they were big losers. “Diversification is clearly the reasonable response” to volatility among markets, Kinnel wrote in a commentary.
He cites nine mutual funds that can make up a diversified portfolio, with a conservative and aggressive choice for each applicable classification.
T. Rowe Price QM US Small-Cap Growth Equity (PRDSX) carries Morningstar’s top rating of gold. It’s “my conservative choice,” Kinnel said. “The quant [mathematical-algorithm-based] fund has a very diffuse portfolio that helps moderate the risk of one or two top names blowing up.”
Fidelity Small Cap Discovery (FSCRX) , which earns Morningstar’s second-highest rating of silver, has low costs and low valuations, Kinnel said. “The fund has been riskier than peers because of its value bent, but that’s part of its appeal.”
Vanguard Total Stock Market Index (VTSAX) is rated gold. It “isn’t less volatile than other large-blend [growth and value] funds, but it is a conservative choice when it comes to costs and diversification,” Kinnel said.
Harbor Capital Appreciation (HACAX) , rated gold, is more aggressive, Kinnel said. “It is a classic growth fund with exposure to many of the technology and healthcare giants. The team running this fund is very good at buying the best of the big names.”
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International Developed-Country Stocks
“Because this is about diversification, I chose two funds that have rather low correlations with the broad foreign market indexes,” Kinnel said.
Goldman Sachs GQG Partners International Opportunities (GSIHX) , rated silver, is Kinnel’s low-risk choice. The fund seeks “durable companies with low debt and a strong market position,” making it resilient in downturns like the current one, he said.
Causeway International Value CIVVX, rated gold, is in the high-risk camp, he said. The fund’s managers are “disciplined value investors who are willing to have country and sector allocations that diverge from those of the benchmark.”
American Funds New World (NEWFX) , rated silver is “a nice emerging-markets fund for chickens,” Kinnel said. “The fund looks for companies that do a lot of business in emerging markets rather than those selling on emerging-markets stock exchanges.”
Harding Loevner Emerging Markets (HLEMX) , rated silver, is Kinnel’s aggressive pick. “It looks for quality growth. Usually that means less risk, but sector and regional bets are still quite aggressive,” he said.
“Conservative commodities funds don’t exist,” Kinnel said. “The key is to limit them to a small part of your portfolio.” He recommends about 5% or less.
Pimco Commodity Real Return Strategy (PCRAX) , earning Morningstar’s third highest rating of bronze, has an “appealing mix of commodities exposure and Treasury Inflation-Protected Securities,” Kinnel said. But keep in mind that “commodities have wild swings.”