7 ways to simplify your investment life

By Morningstar

Providing readers with straightforward, streamlined investment advice was the impetus behind the launch of this Short Answer column in 2004. It's also the focus of Morningstar's best-selling book, "The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success," the second edition of which came out in late 2005.

This column, about how to simplify your investment life, is an excerpt from the book.

Bill Miller, who last year led Legg Mason Value Trust (LMVTX) to its 15th straight year of surpassing the S&P 500 ($INX), is widely regarded as one of the brightest minds on Wall Street. A true contrarian, Miller often makes bold moves, buying stocks that everyone else is seemingly fleeing in droves.

So what on earth do smaller investors like us have to learn from a power broker like Miller? Quite a lot, as it turns out.

No, we're not suggesting you sink a big portion of your portfolio into a single holding or buy stocks when they're in serious trouble -- that kind of stuff is usually best left to the pros. Instead, you should emulate Miller on a more basic level. Like most of the best money managers, including Warren Buffett, Miller is heavily invested in a rather short list of holdings -- just 41 securities at last count. And because he has researched his companies thoroughly and focused on well-managed firms that have what it takes to grow and grow, he holds many of his picks for years.

Most of us would do well to adopt a similarly streamlined approach to running our own portfolios. After all, wouldn't you prefer to have a portfolio devoted to a short list of those investments in which you have the highest degree of confidence, one that you can hold through thick and thin, no matter what the market serves up?

True enough, building such a portfolio is easier said than done. Life is messy, and as our financial lives get more complicated, most of us end up managing multiple accounts -- our own 401(k) plans and those of our spouses, IRAs, 529 college saving plans and various taxable accounts, for example. But by following a few guidelines, you can set up a minimalist portfolio you can really count on.

Stick with the basics

Bill Miller and most other top portfolio managers will tell you that there's a lot of day-to-day "noise" in the market, most of which has little to no bearing on the actual value of their holdings. Individual investors would do well to keep this in mind when building their own portfolios.

True, it's hard to open the business section without seeing an article about the direction of the dollar, spiking oil prices or China's growth. But should you run out and buy an investment that's specifically designed to focus on one of those trends, such as a sector or regional fund? Probably not. Any such offerings tend to be expensive and exceptionally volatile, and individual investors have a record of buying them high and selling them low.

A better strategy, particularly if you're aiming to build a high quality, low maintenance portfolio, is to avoid these niche offerings altogether and instead focus on finding great core mutual funds: broadly diversified offerings with reasonable costs, seasoned management teams and solid long-term risk/reward profiles. If you've done that, you can pretty much tune out the day-to-day noise and let your manager decide whether the next big thing is worth investing in or not.

Investigate one-stop funds

Of course, finding solid core funds is only part of the battle. Establishing and maintaining an asset mix suited to your particular investment objectives is another big task. That's why one-stop funds, particularly target-maturity funds, which "mature," or grow more conservative, as your goal draws near, make sense for so many investors. Because these are funds of funds that provide, in a single package, exposure to stock offerings (both foreign and U.S.), bond funds and cash, they're ideally suited to investors looking to build streamlined portfolios.

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