Chuck Jaffe: How to find one mutual fund to last the next 50 years
My daughter Whitney put me on the spot during a chat we had about finances while driving back to college for her senior year.
I had suggested, among other things, that she open a Roth IRA to get a leg up on saving for retirement that will dramatically improve the rest of her financial life.
Whitney liked the sound of the idea. She’s financially savvy and has worked hard to make and manage money, but she has never, to this point, owned a mutual fund.
“So you are telling me to buy a mutual fund that I would want to invest in for the next 50 years.,” she said. “Okay, what fund should I buy?”
It’s both a simple query and an impossibly difficult proposition.
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In the early days of fund investing — effectively from the 1920s until the mid-1980s — an investor would have simply picked a managed fund, where the manager could go anywhere with the money, providing professional management and diversification at a reasonable price.
Today, it’s hard to find a great go-anywhere fund, especially if you need to believe management can deliver above-average results for longer than an entire career and beyond.
When I started covering the fund industry around the time Whitney was born, standard advice would have been to buy a balanced fund for its professionally managed mix of stocks and bonds. It makes sense as a first fund, but it’s not a great building block for a portfolio once an investor wants to take control of their asset allocation.
The alternative would have been a stock-market index fund, for its low-cost approach to a market that is likely to be up over any period of decades-long investing.
Today, however, there are so-called smart-beta indexes — benchmarks that rebalance automatically or that reflect the S&P 500 SPX, +0.39% in equal-weighting instead of by market value, for example — and target-date funds that mix funds to achieve a portfolio built to last a lifetime and to change as the investor ages.
In short, picking one fund top hold for the next half-century is a tall order.