CHICAGO (Reuters) – You can get most of what you want for your investments from off-the-shelf index funds, but you may have to dig deeper to make your portfolio more productive.
For most mainstream investors, a focus on S&P 500 index funds and a general bond market index serves them well. Yet what if you concentrated on a mixture of different asset classes instead of only picking the usual suspects in conventional index funds that hold the most popular stocks and bonds? You may be able to boost returns while insulating yourself from off years.
An “asset-class investing” approach still relies upon low-cost, passively managed funds as core vehicles, but it puts a greater focus on diversification, which could enhance returns. Giving yourself a piece of every corner of the market means investing in large-, medium- and small-sized companies in developed and emerging markets, plus a broad selection of U.S. and global bonds.
How does it differ? Take the standard approach to indexing the U.S. stock market. Most financial advisers would tell you to buy an S&P index fund, which holds the most popular stocks in the U.S. A good choice would be the SPDR S&P 500 ETF, which holds a mostly passive portfolio at an expense ratio of 0.09 percent annually.
Since many index funds hold stocks that investors have assigned the highest values to, you may not be getting the best prices on them.