Putting the Portfolio on Autopilot

Tired of trying to figure out this hairy market?

There's an easier way: You can put your investment portfolio on autopilot.

Rather than trying to pick the best stocks or mutual funds, some financial advisors say, investors may be able to do at least as well over time by opting for funds that simplify the investing process--and allow you to largely tune it out.

Autopilot-type funds typically fall into one of four categories: index funds that simply copy major market indexes; asset-allocation or "lifestyle" funds, some of which automatically change their investment mix as you age; "funds of funds" that mix mutual funds for you in a single fund portfolio; and balanced funds that always maintain some mix of stocks and bonds.

Though an autopilot portfolio isn't insulated from the market's gyrations, the ride can be smoother.

Just don't take the term autopilot literally, advisors warn. Like a motorist using cruise control, you have to occasionally monitor what's going on.

"These funds have no pizazz, but they do what an investment is supposed to do--which is not to provide prestige or excitement but to get you to your goals," said Meir Statman, finance professor at Santa Clara University.

"Of course, the reason so many people don't use this strategy is the same reason they buy a Lexus when a Toyota will do."

The autopilot approach may seem drab, Statman said, but it actually can be psychologically rewarding.

"These funds not only minimize costs but also the pain of regret that so many other investors go through when their active fund disappoints," he said. "The more you put it on autopilot, the more you can blame God. You can spend time living and push investing into the periphery, the equivalent of brushing your teeth."

Index Funds

Index funds, which hold many or all of the stocks constituting a benchmark, such as the blue-chip Standard & Poor's 500, are the most familiar autopilot vehicles to many investors. With an expanding array of sector, style and foreign index funds available, investors can create as diverse an index portfolio as they like.

Or, advisors say, they can keep it simple by using just three funds: a "total" U.S. stock market fund linked to the Wilshire 5,000 index; a fund that tracks a foreign stock benchmark such as Morgan Stanley's international index; and a fixed-income fund tied, for example, to the Lehman Bros. bond index.