Simple portfolios for complex times

For the sake of single-fund-family investing, here's how I'd build an all-index portfolio of Vanguard funds:

• 55%: Vanguard Total Stock Market (VTSMX), expenses of 0.15%. This fund owns more than 3,500 U.S. stocks -- the whole market from blue chips to microcaps.

• 35%: Vanguard Total International Stock (VGTSX), expenses of 0.27%. That expense ratio includes underlying funds, because this is a fund of three funds: Vanguard European Stock Index (VEURX), Vanguard Pacific Stock Index (VPACX) and Vanguard Emerging Markets Stock Index (VEIEX).

• 10%: Vanguard Total Bond Market Index (VBMFX), expenses of 0.19%. There are good reasons this investment-grade bond fund is home to more than $60 billion in assets. It has low expenses combined with sturdy index-portfolio management, which comes with its own set of traps in the bond sector.

Investors could easily build a similar portfolio of all Fidelity funds but with the caveat that the Fidelity Spartan International Index (FSIIX) fund doesn't include stocks from emerging markets.

Although we recommend dollar-cost averaging -- buying in little by little over time -- investors who want to build a portfolio all at once should consider two Vanguard exchange-traded funds, Total Stock Market Index (VTI, news, msgs) and Total Bond Market Index (BND, news, msgs). They're less expensive.

Option 3: Index funds complemented by specialty funds

Here's an example of how to do that within the 55%-35%-10% broad asset-class weightings.

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U.S. stocks:

• 40% to 45%: A total stock-market index fund such as the one mentioned above.

• 10% to 15%: Add a dedicated small-cap fund. Small caps have historically generated higher returns over time, and in this more inefficient market corner, actively managed funds can add greater value. Our Analyst Picks are good place to start. One that is still open to new shareholders and invests in both growth and value stocks is Masters' Select Smaller Companies (MSSFX).

International stocks:

• 25% to 30%: An EAFE index fund will get you exposure to developed-market large caps, or you can stick with a total-market index fund from Fidelity or Vanguard, for example.

• 5% to 10%: This is the highest-risk, highest-reward part of your portfolio. A foreign small-value fund (registration required) or foreign small-growth fund goes well here. Or pair one of these funds with a diversified emerging-markets fund to get the farthest-reaching global exposure around.

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Bonds:

• A core investment-grade bond fund such as the Vanguard Total Bond Market Index fund or the Harbor Bond (HABDX) fund gets the job done. At the same time, you can better diversify your bond holdings with a reliable multisector bond fund whose manager shifts assets among government bonds, overseas bonds and high-yield bonds depending on where he or she spots the best values.

• Consider putting 10% of your bond holdings (a low-single-digit allocation in your overall portfolio) into a great multisector option such as the Loomis Sayles Bond (LSBRX) fund.

This article was reported and written by Andrew Gunter for Morningstar.

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