Building a Smart, Low-Cost Portfolio

Guess how many mutual funds the average household earning $50,000 to $100,000 owns? According to the Investment Company Institute, the answer is seven. Boost that income to $150,000 or more and the number grows to 12.

However, owning that many mutual or exchange traded funds may be a waste, according to writer Anna Prior of the Wall Street Journal.

She said owning so many not only means you’re probably paying more in annual fees than you need to but you’ve probably got lots of overlap among funds.

(Read More: Bond Fund Investments ‘Stickier’ Than Headlines Indicate)

Prior said you can build a smart, highly-diversified portfolio with as few as three very low-cost index funds. These funds are sold by such firms as State Street, Vanguard, Black Rock and Charles Schwab.

To get the mix you need, Prior recommends a total U.S. stock-market index fund, a total international stock market index fund, and an index fund that buys a broad sampling of U-S and international bonds.

(Watch: 3 Funds for a Diversified Portfolio)

Computer-guided index funds are designed to match the performance of a broad market barometer and are among the cheapest of all funds to own. No, you won’t “outperform” the market in an index fund. But don’t worry too much about that: over the long haul, not many actively managed funds do, either.

In fact, I have long thought that one of the biggest risks in investing is that you dramatically underperform the broad market, and a low-cost index fund basically ensures that you won’t do that.

(Read More: Expect Market Correction, Says Pro)

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