Stock funds are on sale.

And while it's possible that the prices of stocks, and thus stock mutual funds, will be slashed even further, this is a good time for long-term investors to be thinking about putting more money to work in the market.

Many investors are feeling queasy with the Dow Jones Industrial Average down 20.3% from its October closing high -- now technically in bear-market territory, as commonly defined as a 20% drop. Last week the Dow slid 0.5%, bringing its year-to-date drop to 14.9%.

But if you're saving toward a distant goal like retirement, remember that your investment today buys more shares. Despite bear markets and recessions, over time the stock market tends to rise and those extra shares become worth more.

"Volatility is a friend to long-term investors" who can use the "opportunity to buy when things are cheap," says Curtis Jensen, manager of Third Avenue Small-Cap Value Fund.

One way to take advantage of today's discounts without losing too much sleep: seek out mutual funds that have strong long-term returns along with less downside risk than their peers.

Ten Funds to Consider

To that end, Morningstar analysts recently sorted through their database for U.S.-stock funds with strong 10-year records under long-tenured managers -- as well as "below average" or "low" risk ratings as figured by the Chicago research firm. Those risk ratings are based on how often a fund has lost money compared with others in the same category.

A total of 16 funds met these and some additional criteria, including assets of at least $1 billion; of those 16, the 10 funds with the best 2008 performance rankings in their respective categories, including Mr. Jensen's fund, are shown here.

Focusing on a fund's long-term performance allows investors to look past recent market volatility for a better picture of overall fund performance, including how "funds performed through various market cycles," says Morningstar analyst Karin Anderson.

Over the past decade, the 16 funds identified by Morningstar have delivered returns equivalent to 6.91% a year, versus just 2.88% a year for the Standard & Poor's 500-stock index, the most widely used benchmark for U.S.-stock funds.

But investing even in proven, less-volatile stock funds doesn't mean avoiding losses. Indeed, none of the 16 funds showed a positive return from the Dow's all-time high on Oct. 9 through midyear. Over that period, 14 of the funds had smaller declines than the Dow, and 13 had smaller drops than the S&P 500.

Long-Term Perspective

A number of the funds on Morningstar's list aim to hold shares of solid businesses for years at a time. For instance, Baron Growth Fund seeks well-managed small businesses with the potential to double in size every five years, while doubling the value of the fund's investment, says manager Ron Baron. "We look for companies that are going to grow in a long period of time, no matter what happens in the stock market."

While the companies may be growing, however, those share prices on average haven't grown in recent months: Baron Growth was down 14.18% from the market high through midyear.

Mr. Baron figures even the fund's worst-performing holdings this quarter, recreation and resort companies including Wynn Resorts and Ameristar Casinos, will eventually "see a comeback." People are trimming their spending now, but in time "everyone wants to go on vacation and will just work harder to get there," he says.

Mr. Jensen's Third Avenue Small-Cap Value has the best 10-year record among the 10 funds on our list, and it has also declined the least since the market peak. It ranks in the top 10% of Morningstar's "small value" fund category so far this year and over the past 12 months.

Mr. Jensen aims to invest in cheaply priced stocks of companies with strong balance sheets. The fund has benefited from significant holdings in the strong-performing energy sector while avoiding struggling financial companies and home builders.

Taking a different tack, Meridian Growth, run by Rick Aster, tends to avoid cyclical stocks like energy and industrials. "Meridian bets on consumer staples with a patient approach that has been holding up well," Ms. Anderson of Morningstar says. One recent top holding: dental-products supplier Dentsply International.

Stung by Financials

Some funds that favor stable dividend-paying stocks have been stung recently by losses on financial shares, traditionally a core holding of such funds.

For instance, American Century Equity Income Fund sold Citigroup and Freddie Mac at a loss in the second half of last year, co-manager Phil Davidson says. The fund declined 14.5% from the Dow's peak through midyear.

Still, the fund ranks in the top 20% of Morningstar's "large value" category this year and over the past 12 months. "It would be almost impossible not to be down, but we're keeping our record going on a relative basis and hoping for a smoother ride," Mr. Davidson says.

Source : http://online.wsj.com

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By looking at examples of different portfolios, we can get a feel for how we should form our portfolio and which mutual funds might be good to look into using.

Remember, as you read through these portfolios, you need to modify these examples to fit your individual financial situation. When you finish, your portfolio might not look like any of these examples. You need to ask yourself, how much risk am I taking and how much reward am I getting for that risk. If you don’t feel comfortable with the risk don’t take it. Money is not worth losing one nights sleep over.

Scott Burns’ Lazy Portfolios (Assetbuilder.com):

Scott Burns’ Lazy Portfolios

Scott Burns is one of the most widely read personal finance writers in the country. Mr. Burns is also in favor of using simple, but effective model portfolios as a foundation for long-term investing. In fact, to illustrate that view, he created five unique portfolios which also have solid long-term track records: Couch Potato, Margarita, Four Square, Five Fold, and Six Ways From Sunday.

Couch Potato Portfolio:
- 50% in Vanguard Total Stock Market Index Fund (VTSMX)
- 50% in Vanguard Inflation Protected Securities Fund (VIPSX)

Margarita Portfolio:
- 33.3% in Vanguard Total Stock Market Index Fund (VTSMX)
- 33.3% in Vanguard Inflation Protected Securities Fund (VIPSX)
- 33.3% in Vanguard Total International Stock Index Fund (VGTSX)

Four Square Portfolio:
- 25% in Vanguard Total Stock Market Index Fund (VTSMX)
- 25% in Vanguard Inflation Protected Securities Fund (VIPSX)
- 25% in Vanguard Total International Stock Index Fund (VGTSX)
- 25% in Vanguard REIT Index (VGSIX)

Five Fold Portfolio:
- 20% in Vanguard Total Stock Market Index Fund (VTSMX)
- 20% in Vanguard Inflation Protected Securities Fund (VIPSX)
- 20% in Vanguard Total International Stock Index Fund (VGTSX)
- 20% in Vanguard REIT Index (VGSIX)
- 20% in American Century International Bond Fund (BEGBX)

Six Ways From Sunday Portfolio:
- 16.65% in Vanguard Total Stock Market Index Fund (VTSMX)
- 16.65% in Vanguard Inflation Protected Securities Fund (VIPSX)
- 16.65% in Vanguard Total International Stock Index Fund (VGTSX)
- 16.65% in Vanguard REIT Index (VGSIX)
- 16.65% in American Century International Bond Fund (BEGBX)
- 16.65% in Vanguard Energy (VGENX)

Ted Aronson’s Lazy Portfolio

I’m not sure I know exactly where the term “lazy portfolio” originated, but if you do a simple Google search using those two words, you’re likely to find information about Ted Aronson and his lazy portfolio strategy which has soundly beaten the S&P 500. Last year’s return was +15.9% and the portfolio has a 5-year annualized return of +13.3%. Below you’ll see how the portfolio is set up:

Ted Aronson (AJO Partners)
- 20% in Vanguard Emerging Markets Stock Index (VEIEX)
- 15% in Vanguard 500 Index (VFINX)
- 15% in Vanguard Pacific Stock Index (VPACX)
- 10% in Vanguard Extended Market Index (VEXMX)
- 10% in Vanguard Inflation-Protected Securities (VIPSX)
- 5% in Vanguard European Stock Index (VEURX)
- 5% in Vanguard High-Yield Corporate (VWEHX)
- 5% in Vanguard Long-Term U.S. Treasury (VUSTX)
- 5% in Vanguard Small Cap Growth (VISGX)
- 5% in Vanguard Small Cap Value Index (VISVX)
- 5% in Vanguard Total Stock Market Index (VTSMX)

William Bernstein’s No-Brainer Portfolios

William Bernstein, a neurologist by trade and well-known author of books like “The Four Pillars of Investing,” has made a name for himself by being a vocal critic to the Wall Street establishment. And, like many others, Bernstein believes 1) you should stick with index funds with a risk-return profile that you desire, and 2) that properly diversified low cost funds offer you the best chance of long-term success.

To meet that goal, here are two of his highly recommended lazy portfolios:

William Bernstein’s Basic No-Brainer Portfolio (Regular or Tax Friendly)
- 25% in Vanguard 500 Index (VFINX)
- 25% in Vanguard Small Cap (NAESX) or (VTMSX)
- 25% in Vanguard Total International (VGTSX) or (VTMGX)
- 25% in Vanguard Total Bond (VBMFX) or (VBISX)

William Bernstein’s No-Brainer Coward’s Portfolio:
- 40% in Vanguard Short Term Investment Grade (VFSTX)
- 15% in Vanguard Total Stock Market (VTSMX)
- 10% in Vanguard Small Cap Value (VISVX)
- 10% in Vanguard Value Index (VIVAX)
- 5% in Vanguard Emerging Markets Stock (VEIEX)
- 5% in Vanguard European Stock (VEURX)
- 5% in Vanguard Pacific Stock (VPACX)
- 5% in Vanguard REIT Index (VGSIX)
- 5% in Vanguard Small Cap Value (NAESX) or (VTMSX)

Bill Schultheis’ Coffeehouse Portfolios

Bill Schultheis, author of the very popular and high-regarded book titled “The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life” is another proponent of the keeping it simple approach. A former broker for Smith Barney and current financial advisor for Pacific Asset Management, offers three principles of investing:

1) Don’t put all your eggs in one basket. (Diversify in different asset classes.)
2) There is no such thing as a free lunch. (Capture the entire return of each basket, or asset class, through low cost index funds.)
3) Save for a rainy day. (Develop a long term financial plan).

If you take time explore Bill’s website, you’ll also discover a fresh perspective about investing and money and its influence over your life. In addition, Bill has provided three basic portfolios for you to consider:

Three ETF Fund Portfolio:
- 33.3% in Vanguard Total Stock Market (VTI)
- 33.3% in iShares International MSCI EAFE Value Index (EFV)
- 33.3% in iShares Lehman Aggregate Bond (AGG)

Coffeehouse Portfolio (ETFs):
- 40% in iShares Lehman Aggregate (AGG)
- 10% in iShares S&P 500 (IVV)
- 10% in iShares S&P 500/Barra Value (IVE)
- 10% in iShares MSCI EAFE (EFA)
- 10% in iShares Dow Jones US Real Estate (IYR)
- 10% in iShares Russell 2000 Value (IWN)
- 10% in iShares Morningstar Small Core (JKJ)

Coffeehouse Portfolio (Vanguard):
- 40% in Vanguard Total Bond Index (VBMFX)
- 10% in Vanguard 500 Index (VFINX)
- 10% in Vanguard Value Index (VIVAX)
- 10% in Vanguard International Stock Index (VGTSX)
- 10% in Vanguard REIT Index (VGSIX)
- 10% in Vanguard Small-Cap Value Index (VISVX)
- 10% in Vanguard Small-Cap Index (NAESX)

David Swensen’s Lazy Portfolio

I have tremendous respect for David Swensen. One of my favorite books last year was his book “Unconventional Success: A Fundamental Approach to Personal Investment” and, if you haven’t read it, I recommend it highly.

David is the chief investment officer of Yale University where he produced a two-decade investment record of +16.1% per year returns. His track record easily places him as one of the best managers of institutional money in the United States. So, what does one of the best money managers around recommend for individual investors? Well, here’s the portfolio:

David Swensen’s Lazy Portfolio:
- 30% in Vanguard Total Stock Market Index (VTSMX)
- 20% in Vanguard REIT Index (VGSIX)
- 20% in Vanguard Total International Stock (VGTSX) or (15% in VDMIX and 5% in VEIEX)
- 15% in Vanguard Inflation Protected Securities (VIPSX)
- 15% in Vanguard Short Term Treasury Index (VFISX

Ben Stein’s Model Portfolios

I like Ben Stein. I’ve read enough of his articles and books through the years that in my opinion I think he’s both sincere and dedicated to helping others.

Not surprising, Ben is also in favor of indexed-focused long-term investing and believes that you should focus your investments on dominant big picture themes to produce even greater returns. For example, Ben has made it clear that he thinks Americans would be smart to have exposure to the world’s emerging markets. In addition, Ben’s portfolio is the only one that I will profile this week that actually sets aside some cash “for a rainy day.” Now, there’s an unusual recommendation!

Ben Stein’s Long-Term Portfolio:
- 30% in Fidelity Spartan Total Market Index (FSTMX) or Total Stock Market ETF (VTI)
- 15% to 20% in iShares MSCI EAFE Index (EFA)
- 10% in iShares MSCI Emerging Markets Index (EEM) or Emerging Markets 50 ADR (ADRE)
- 10% in iShares Cohen & Steers Realty Majors (ICF)
- 10% in iShares Russell 2000 Value Index (IWN)
- 15% in Cash

Jim Lowell’s Sower’s Growth Portfolio

Jim Lowell is a jack of all trades. He’s the editor of several well-known publications (like Fidelity Investor and The ETF Trader at Marketwatch), author of several books including “What Every Fidelity Investor Needs to Know,” a partner at investment advisory firm, and founder of The Ranking Service which offers research for institutions. So what does this Harvard educated guru think that investors should do with their money?

The Sower’s Growth Portfolio:
- 25% in iShares MSCI EAFE (EFA)
- 15% in iShares DJ U.S. Total Market (IYY)
- 15% in Mid Cap SPDR Trust (MDY)
- 10% in Diamonds Trust (DIA)
- 10% in iShares Russell 2000 (IWM)
- 10% in iShares MSCI Emerging Markets (EEM)
- 7.5% in Fidelity NASDAQ Composite (ONEQ)
- 7.5% in Power Shares Dynamic Market (PWC)

This portfolio will be of particular interest to those of you who do not like the offerings at Vanguard which seem to dominate so many other lazy portfolios I will profile this week. Jim has also provided a few alternatives that we haven’t seen before in other portfolios.

Frank Armstrong’s Ideal Index Portfolio

Investment advisor Frank Armstrong is well-known for his book, “The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio” as well founding his own advisory firm. While Frank is a big fan of using funds from Dimensional Fund Advisors (which are only available to institutions and financial advisers), in his view this is as close to an ideal portfolio you can get which offers the best returns with the least amount of risk:

Frank Armstrong’s Ideal Index Portfolio:
- 31% in Vanguard Total International Stock (VGTSX)
- 30% in Vanguard Short-Term Bond (VBISX)
- 9.25% in Vanguard Small Cap Value (VISVX)
- 9.25% in Vanguard Value (VIVAX)
- 8% in Vanguard REIT (VGSIX)
- 6.25% in Vanguard Small-Cap Growth (VISGX)
- 6.25% in Vanguard 500 Index (VFINX)

John Wasik’s Nano Investment Portfolio

John Wasik, author of “The Kitchen-Table Investor,” and columnist for Bloomberg News, has also provided us another lazy portfolio to consider which he calls the nano investment portfolio:

John Wasik’s Nano Investment Portfolio:
- 20% in Vanguard Total Stock Market VIPERS (VTI)
- 20% in Vanguard Total International Stock (VGTSX)
- 20% in Vanguard REIT VIPERS (VNQ)
- 20% in iShares Lehman TIPS Bond (TIP)
- 20% in iShares Lehman Aggregate Bond (AGG)

Source: http://www.kiedaisch.com

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