4 Easy Ways to Build Profitable Portfolios

Morningstar mixes it up with target-dates, all-index, and active funds.

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Morningstar's guide to building a simple, low-stress portfolio aims to calm anxious investors who seem steps away from overhauling their entire portfolio in reaction to the market's recent swings. (Making dramatic adjustments based on short-term news is never a good idea.)

But Morningstar's suggested portfolios work for starting-out investors, too. Analyst Andrew Gunter assumes investors have time horizons at least 10 years out and are willing to ride out the ups and downs of the stock market. For the sake of picking bond funds, he also assumes investors are holding their portfolio in a tax-deferred account, such as an IRA or 401(k).

• Simple Portfolio #1: A target-date fund. This is a ready-made portfolio that automatically adjusts to become more conservative as the years pass. All you do is choose the date you expect to cash out; it doesn't get much simpler. Among funds with target dates of 2030 or later, Morningstar favors the T. Rowe Price Retirement and the Vanguard Target Retirement funds.

• Simple Portfolio #2: An all-index portfolio. Morningstar spices it up a bit with their second suggestion: "Join the Bogleheads." (Jack Bogle, founder of the Vanguard Group, is a big booster of index funds.) Gunter lays out an all-index portfolio made up of three Vanguard funds: one that invests in bonds, one that covers the entire U.S. stock market, and a third that holds international stocks. (Note: Fidelity's Spartan index funds are competitive when it comes to expenses, but they require a minimum investment of $10,000 versus Vanguard's $3,000 minimum.) Here's how it breaks down:

55 percent: Vanguard Total Stock Market fund

35 percent: Vanguard Total International Stock

10 percent: Vanguard Total Bond Market Index

• Simple Portfolio #3: An all-ETF portfolio. This is my suggestion: Investors who don't have enough cash to create the Vanguard portfolio can come close with exchange-traded funds. Check out this sample portfolio, which ran as part of our story "Building a Portfolio on the Cheap."

• Simple Portfolio #4: Mix it up. Use index funds as your main holdings, but include a few actively managed funds to juice returns. In one example, Gunter reserves a slice of the 55 percent U.S. stock allocation for an actively managed small-company fund.

If you've got Vanguard funds on the brain now, check out this story on MSN Money: "Vanguard's Best Bets for Your 401(k)." Author Tim Middleton polled financial advisers about which Vanguard funds they'd recommend to their 401(k) clients. The most-nominated fund was Vanguard Wellington, a balanced fund which includes stocks and bonds. Other favorites included Vanguard Capital Opportunity, Vanguard Primecap, and Vanguard Primecap Core.