The Autopilot Portfolio

The Autopilot Portfolio

By Tim Hanson (TMFMmbop)

 

Stocks are a lot of work. I should know -- I'm addicted to them. My wife and I hold 18 stocks in our taxable accounts, and I'm up to date on every one of them. I read the news, check the financials, and constantly update my spreadsheet valuations.

 

It's fun, sure, but not as much fun as it sounds. And if you're not addicted to stocks, a portfolio like that can be an utter disaster.

 

Our individual retirement accounts (IRAs), on the other hand, are a dream. We have long timelines, and I've constructed them so that I don't have to worry about day-to-day machinations. I know what's in them, and I know they'll be just fine.

 

Sound like a good deal? Then I'll let you in on my little secret ...

 

Mutual funds

When building our IRAs, I was most worried about smart asset allocation. I wanted a mix that would meet our needs and not jump the shark.

 

Where'd I start? I started with the entire stock market: Vanguard Total Stock Market (AMEX: VTI). This exchange-traded fund (ETF) tracks the U.S. Broad Market Index and invests in more than 1,300 stocks for the low, low cost of 0.07% per year. The top holdings are the stalwarts you'd expect: Altria (NYSE: MO), Intel (Nasdaq: INTC), and Microsoft (Nasdaq: MSFT), to name three. And because Total Stock Market is an index tracker, the beauty of this low-cost holding is that it will change with the index. In other words, it can never jump the shark.

 

But wait -- there's more

From there, I decided to gain some extra international exposure. While it's true that many of the stocks in the U.S. Broad Market Index operate internationally, it's also true that many of tomorrow's global stalwarts are overseas firms that most investors have not even heard of yet. And with GDP growth in China and India exceeding that of the United States by six and three percentage points, respectively, the odds are that many of these companies will come from countries outside my realm of expertise. So my low-cost, long-term solution was Vanguard Emerging Markets (AMEX: VWO). With an expense ratio of just 0.30%, this ETF tracks the performance of the Select Emerging Markets Index. The top holdings include Israel's Teva Pharmaceutical (Nasdaq: TEVA), Korea's Kookmin Bank, and China Mobile. The ETF is up 23% since inception in March of this year. Not bad for a low-cost, low-stress option.

 

Because smaller companies can really punch up a portfolio with their long-term gains, I added some extra mid- and small-cap exposure. Historically, the S&P MidCap 400 is a difficult index to beat, so I bought the whole enchilada through the iShares S&P MidCap 400 (IJH) ETF. The average company in the index has a market cap of just $3.4 billion, and top holdings include hot performers such as SanDisk (Nasdaq: SNDK) and Chico's -- the best-performing stock of the past 10 years.

 

The best part about holding funds like these is that they self-correct and evolve with the world around them. The most work you'll have to do is when you rebalance once a year.

 

The Foolish bottom line

Today, our IRAs are 100% in equities. That will have to come down as we get older. But so far, so good. We're ahead of the broader market, and I haven't had to sell a thing.