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INVESTING: QUARTERLY REVIEW & OUTLOOK

Putting the Portfolio on Autopilot

Some mutual funds are all about simplifying investing and smoothing the ride for people who mostly prefer to tune out.

April 09, 2001|JOSH FRIEDMAN | TIMES STAFF WRITER

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.

The bulk of your portfolio would be in the U.S. index fund. Then, advisors typically suggest a 20% to 30% international stock allocation, though many investors are reluctant to invest that heavily abroad.

A 10% allocation to foreign stocks is better than nothing, Statman said. His view is that "there's no reason to think that U.S. markets will outperform the world" or that the historically high correlation in recent years between domestic and major foreign markets will continue.

Recommended bond index fund weightings generally fall in the same 20% to 30% range, though they may be higher for older investors.

Russ Kinnel, head of fund research at fund tracker Morningstar Inc., said investors should seek the most broadly diversified index funds with cheap expense ratios and low annual portfolio turnovers to help limit risk and boost tax-efficiency as well as performance.

Lifestyle and Asset-Allocation Funds

For investors who don't want to do much if any portfolio mixing themselves--let alone having to change the mix over time--many of the large fund families such as Vanguard Group, T. Rowe Price Associates and Fidelity Investments offer lifestyle or life-cycle funds.

"For someone who doesn't want to have to choose, a balanced or lifestyle fund can be a good way to go," said Shlomo Benartzi, a professor at UCLA's Anderson School.

With such funds, the asset mix is tailored to the investor's general time horizon and temperament and is changed automatically as the investor ages--usually becoming more conservative over time.

Fidelity, for example, offers the Freedom 2020 Fund, designed for investors retiring around that year.

But such a cookie-cutter approach isn't for everyone.

"Lifestyle funds will automatically change your allocation based on a retirement date of 65, which might not necessarily be your target," noted Kurt Brouwer, an investment advisor based in Tiburon, Calif.

Added Kinnel: "The fund's mix might be right for a lot of people but not for you."

Vanguard LifeStrategy Growth, for instance, holds about 15% of assets in bonds, a figure that might be too high to suit some young, growth-oriented investors, he said.

Some asset-allocation funds don't change their mix as shareholders age but rather commit to a specific investment style and are supposed to stick with it. Typically, such funds label themselves as either aggressive, moderate or conservative in their investing, achieving their mix with stocks, bonds and money-market securities.

But Kinnel said investors should make sure "they're really getting something on autopilot" if that's what they want in an asset-allocation fund.

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