

Market Analysis
The term "best" can vary widely among individuals. For instance, the ideal movie for a romantic evening may not suit a family outing with children. Similarly, the best sushi restaurant depends on whether one enjoys sushi. In the same way, the optimal investment strategy differs from person to person, influenced by factors like age, savings capability, risk tolerance, and individual preferences. However, certain principles, such as diversification and cost management, are universally important for investors.
With this context in mind, here are five effective investment strategies worth considering. This list is not exhaustive, and what works well for one person may not be suitable for another. Think of it as a starting point to help you tailor your investment approach based on your unique situation.
Five Investment Strategies Recommended
Balanced Funds
Balanced funds combine stocks and bonds, often following a 60/40 allocation—60% in U.S. stocks and 40% in U.S. bonds. While some funds may incorporate international securities or adjust the ratio slightly, this mix is commonly known for its long-term stability. Morningstar's portfolio strategist, Amy Arnott, suggests that despite its simplicity, the 60/40 portfolio serves as a solid foundation for many investors.
The appeal of balanced funds lies in their all-in-one solution for those hesitant to invest exclusively in stocks. Although they typically yield lower returns than pure stock funds over time, they can offer satisfactory risk-adjusted returns. Furthermore, balanced funds automatically maintain their allocation, saving investors the effort of rebalancing.
However, balanced funds may not be ideal for taxable accounts due to their bond components and ongoing rebalancing. They are best suited for tax-advantaged accounts like 401(k)s and traditional IRAs. Financial experts generally advise younger investors to seek more stock exposure than what a balanced fund provides.
Three top-rated balanced funds with a Gold Morningstar Medalist Rating are:
American Funds Moderate Growth and Income BLPEX
T. Rowe Price Balanced RBAIX
Vanguard Wellington VWELX
Target-Date Funds
Like balanced funds, target-date funds also invest in stocks and bonds while automatically adjusting their asset mix as the investor approaches retirement age. These funds have a predefined glide path, making them suitable for those who prefer a hands-off approach to investing. Morningstar's Christine Benz points out that these funds effectively capitalize on investors' natural inclination towards inertia, providing a beneficial solution.
Target-date funds are increasingly popular as default options in 401(k) plans because they dynamically adjust allocations according to the investor's life stage, ensuring the asset mix remains appropriate over time.
The drawbacks of target-date funds include limited tax efficiency due to ongoing rebalancing, similar to balanced funds. Additionally, supplementing them with other funds can complicate the overall asset allocation.
Three target-date series with Gold Medalist Ratings are:
American Funds Target-Date Retirement
T. Rowe Price Retirement
Fidelity Freedom Index
Total Market Index Funds
Total market index funds are passive investments that track broad indexes, either within the U.S. or globally. These funds are appealing due to their low costs and significant diversification, requiring no active stock or bond selection.
Investors might find total market index funds suitable as standalone investments or as part of a diversified portfolio. A young investor may choose to invest solely in a total U.S. stock fund initially and then add a total bond market fund as retirement approaches.
Some of the top-rated total market index exchange-traded and mutual funds with a Gold Medalist Rating include:
Fidelity Total Market Index FSKAX
iShares Core S&P Total U.S. Stock Market ETF ITOT
Vanguard Total Stock Market ETF VTI
Three-Fund Portfolio
The three-fund portfolio consists of three essential funds representing major asset classes: U.S. stocks, international stocks, and bonds. This strategy suits investors who are further along in their investment journey and may seek to dampen portfolio volatility through bond inclusion.
This approach requires more involvement from the investor, particularly in terms of rebalancing and adjusting the asset mix as retirement nears. Morningstar's Lifetime Allocation Indexes can help determine the appropriate asset allocation based on life stage.
John Rekenthaler from Morningstar considers the three-fund portfolio a fantastic starting point for novice investors and a sensible endpoint for experienced ones. This strategy can also serve as a core position for those looking to explore additional investment opportunities.
Custom-Fit Portfolio
The most intricate strategy is creating a custom-fit portfolio tailored to individual preferences. This could involve incorporating inflation-protected securities or targeting specific subasset classes, such as small-cap stocks or international bonds. Some may even prioritize investments that align with their values, focusing on environmental, social, and governance criteria.
While some investors develop custom portfolios early on, many begin with simpler strategies before transitioning to a more personalized approach as they gain experience, accumulate wealth, or move closer to retirement.
Each of these strategies offers a unique approach to investing, catering to various preferences and circumstances. By understanding these options, you can select a method that aligns with your financial goals and personal style.
Paraphrasing text from "MorningStar" all rights reserved by the original author.