Vous êtes sur la page 1sur 29

Invest Better in 2012

Start your own financial turnaround, regardless of the market’s mood.

Featured in this booklet How to Create a Budget You Can Live With


Five Tips for Your Emergency Fund


Making Your Investment Policy Statement


Find the Right Stock/Bond Mix


Three Core Stock Funds You Don’t Have to Babysit


How to Find the Best Core Bond Funds


The Right Investments for Short-Term Goals


Rebalancing Made Simple


Avoid These Four Investment Mistakes


Compliments of Morningstar

Securities in this Report

Click a security below to see the analyst report as a benefit of your Morningstar Premium membership.

Featured in this booklet Dodge & Cox Income (DODIX)

* listed alphabetically. Morningstar does not itself offer, endorse, or promote, directly or indirectly, any investment, trade, trading service or investment advice, or any sponsor’s product or service. Every investor should carefully consider all information gathered in this report for suit- ability to personal needs and circumstances.

Here at Morningstar, our analysts spend much time and attention each day digging into investments— stocks, bonds, mutual funds, and ETFs—to help investors uncover those securities with the most promising prospects.

We know that picking the right investments is a big part of successful investing—but it’s just one part. Our timing (when we buy and sell), our portfolio allocations and concentrations, our temperament (especially in times of market extremes), and a thoughtfully designed financial foundation (including an investment policy statement) play big roles in helping us all become better investors.

In this special report, I’ve presented a comprehensive plan to better investing, from setting a realistic household budget all the way to monitoring a well-diversified investment portfolio. And although this report is meant to take a holistic approach, fear not—we didn’t skimp on the specific investment ideas! You’ll find some of our top choices for shorter-term investing as well as many of our favorite stock and fixed-income funds for the core of your portfolio.

No one knows what the market will bring in 2012, but investors needn’t wait for an up market to take pos- itive steps for their financial futures. With a level-headed, long-term plan and the right mix of topnotch investments, you can make 2012 the start of your own financial turnaround. At Morningstar, it’s our mission to give you the tools and insights you need to do just that.

Best wishes for a successful 2012 and beyond,

just that. Best wishes for a successful 2012 and beyond, Christine Benz Director of Personal Finance

Christine Benz

Director of Personal Finance Morningstar.com

How to Create a Budget You Can Live With

We all need a budget, regardless of age, life stage, or whether we think we’ve “made it” or not. Use our budget worksheet to get your spending and saving on track.

By Christine Benz Director of Personal Finance Morningstar.com

A few years ago, I received an e-mail from a couple

seeking a portfolio makeover. They were in their mid-50s, and their portfolio had been taken on

a wild ride during the financial crisis from 2007

through early 2009. That, in turn, had scuttled their

hopes for retirement in less than a decade, and they were wondering how they could make up the lost ground.

This couple’s investment portfolio, with more than 80% in stocks, was clearly too aggressive given their life stage. In talking with them about their finances, however, I discovered that their investments weren’t their main problem. Their spending was.

The couple had scrimped and saved to buy a carpet- cleaning business in the early 1990s and went through some lean years while they were building up their clientele. Thanks to their sacrifices and hard work, the business was generating more than $200,000 in take-home income per year.

As is so often the case, however, this couple’s spending went up right along with their pay,

and their savings slowed to a trickle. They bought

a bigger home, took regular trips to Las Vegas,

and were in the habit of spending money on nearly anything they wanted, from flat-screen TVs to catered family parties.

When I asked them if they had a budget, they said that they once had. While they were buying and building up their business, they lived in a two- bedroom apartment with their two children.

But after their income had increased to a more comfortable level, they didn’t see as much need for budgeting and eventually stopped tracking their expenses altogether. When they tried to look back on what they had spent over the past month, more than $1,500 was unaccounted for. I pointed out that if they were to save that amount each month rather than spend it on stuff that they could not remember, that would do far more to get their portfolio back on track than selecting the right investments ever could.

Because we all have a natural tendency to spend what we have, everyone needs a budget, regardless of age, life stage, or whether we think we’ve “made it” or not. The key point about a budget is that it helps ensure that your spending syncs up with your priorities. This couple wanted to balance their here-and-now goals of travel and fun with their long-term goals of funding a comfortable retirement and perhaps leaving a legacy for their children.

Here’s a quick overview of how to create a budget you can live within.

Step 1 Enter your current fixed and variable expenses, as well as information about your sources of income, on Morningstar.com’s Budget Worksheet. For expenses and income sources that do not fit neatly into the categories provided, use the “other” lines. If you have several expenses of a given type, make a note alongside the line item—for example, “DVD Rentals” or

“Toiletries/Makeup.” Also record any savings that you’re typically able to set aside each month.

Step 2 Start the budgeting process by scrutinizing your variable (or discretionary) expenses over the past month(s). Because you have the most control over this set of costs, making adjustments here is the fastest way to improve your household’s financial picture.

Be forward-looking as you evaluate your variable expenses. The data you’ve supplied about your income and spending provides a snapshot of the money you have coming in and going out. But your budget gives you a chance to shape your spending to fit with your goals, both personal and financial. For example, you may have spent a lot on carryout and restaurant meals over the past month. But if getting in shape is on your list of personal priorities, you can tweak your budget to reduce your spending on restaurant meals and increase the dollars that you’re allocating toward food from the grocery store so you can prepare healthy meals at home.

As you go through the process of evaluating your variable expenses, it’s also essential to be realistic. Just as dieters can’t stick with the plan if it doesn’t allow for the occasional piece of birthday cake or glass of wine, it’s also unrealistic to plot out a budget with no room for the occa- sional movie or lunch with friends. Using your real past expenses as a template for your budget helps anchor you in reality, not a pipe dream.

If you anticipate expenses that are predictable but not necessarily monthly—such as holiday and birthday gifts—it’s a good idea to distribute those costs throughout the year. Look back on the past year’s worth of gift giving, estimate your expenditures, and adjust downward or upward as you see fit. Then divide by 12 to arrive at your monthly budgeted amount.

Record your target expenditures for each line item in the Budget column on the Budget Worksheet.

Step 3 Next, turn your attention to your fixed expenses on the Budget Worksheet. Although household necessities are usually referred to as fixed costs, that’s a bit of a misnomer. Yes, these items are necessities, but you may be able to adjust them somewhat. Among the areas where it’s possible to reduce your fixed costs are:








Credit card interest rates (sometimes, but not always, negotiable)

Mortgage payments (if refinancing is an option)

Telecom services such as landline phones, cel- lular phones, Internet service, and cable TV/satellite (you may be able to change provid- ers or negotiate a lower rate with your current provider, especially if you’re purchasing more than one service)

Take note of the areas where you may be able to reduce your fixed costs and plan to follow up on them. If you are able to obtain reductions in these areas, adjust your budget accordingly.

Step 4 As you tweak your target expenditures, pay attention to how the changes affect your bottom line. Your goal should be not only to balance your household budget but also increase the amount you have earmarked for saving and investing each month.

Step 5 Finally, put in place a plan to check your real-life spending versus your budget on an ongoing basis. One of the key mistakes that people make when budgeting is that they create a budget and then put it in the drawer.

Start by finding a place to record your household’s expenses. Software programs like Quicken can help you track your expenses, but you can also track them with a pen and paper. Be sure to ask your spouse to do the same.

Next, block out time on your calendar each month (ideally, one hour per month over the next three to six months) to check up on your actual expenses versus your budget. If your first budget assumptions were unrealistic or if something material has changed in your house- hold’s financial picture, adjust your budget accordingly.

Five Tips for Your Emergency Fund

How to navigate when fear is running high and yields are running low.

By Christine Benz Director of Personal Finance Morningstar.com

Q: I often hear that you should keep three to six months’ worth of living expenses in an emer- gency fund, and you’ve written that some people should keep even more. But in a low-yielding environment, that’s an awful lot of money to have sitting in the bank earning next to nothing. Any advice?

A: You’re right—the past few years have brought

a negative convergence for emergency-fund

investors. A still-shaky economy and uncertain job market have underscored the importance of building a cash cushion to cover your costs in case of job loss or big, scary, unanticipated expenses such as medical bills or home repairs. At the same time, available yields on emergency fund-appropriate investments have shriveled to next to nothing.

What to do? Here are some tips:

1. Customize, based on your own situation Three to six months’ worth of living expenses is a reasonable starting point when setting your

emergency fund amount. But think of it as just that:

a starting point. From there, you’ll want to

customize your emergency-fund amount based on your own situation. The basic question is this:

How much time would you want to replace your job

if you lost yours? The key swing factors that

should affect your decision are how flexible you are

in terms of your career choices and lifestyle.

Consider holding a larger emergency fund (six months’ to a year’s worth of living expenses—or more) if you:









Have a high-paying job

Hold a position in a highly specialized field

Are self-employed

Work on a freelance/contract basis

Have dependents

Have a nonworking spouse

Have high fixed expenses, such as a mortgage, auto loans, and tuition bills

Have a pre-existing medical condition that could result in hefty health-care bills if you were forced to purchase private health insurance

On the flip side, you may be able to get by with a smaller emergency fund if you:




Have a good degree of career flexibility because you are in a lower-paying position and/or haven’t yet developed a special- ized career path

Have other sources of income that could help defray a large share of household expenses, such as a working spouse

Have a great degree of lifestyle flexibility (for example, you would be willing to relocate or get a roommate)

2. Focus on the essentials Setting aside even three months worth of living expenses might sound like a daunting sum,


particularly if you look back on your real-life spend- ing habits. But once you strip out discretionary expenses that you could easily live without if you needed to, your emergency-fund amount is going to look a lot more manageable. To help find the right emergency-fund target, look back on your fixed expenses during the past several months:

mortgage or rent, taxes, utilities, insurance, car payments, and food bills.

Bear in mind, however, that one key expense category could spike up if you lost your job: health- care costs. Your company’s human resources administrator should be able to provide you with a quote on what obtaining COBRA continuation health coverage would cost, and you can also go to ehealthinsurance.com to obtain a range of insur- ance quotes for a person/family in your age range.

3. Build a two-part emergency fund

If you’ve decided to be conservative and build a

large emergency fund—and I think that’s a good strategy for those of you with higher-paying jobs and high fixed costs—you might consider splitting it into two pieces. For example, you might park three months’ worth of living expenses in a traditional emergency-fund parking place (or a com- bination of them): your checking and savings account, a CD, money market account, or money market mutual fund.

To help address the fact that those truly safe

investments are yielding next to nothing, you could then put another nine months’ worth of expenses (or more) in a vehicle that would deliver

a slightly higher yield in exchange for modest

fluctuations in principal value. A short-term bond

Index VBISX would be appropriate for this role. If you’re in a higher tax bracket, consider a short-term municipal fund; Fidelity Short-

are some of Morningstar’s favorites in this cate- gory, both receiving an Analyst Rating of Gold.

4. Multitask through a Roth

What if you’re trying to build an emergency fund while saving for retirement at the same time?

If that’s you, you can consider building at least part of your emergency fund in a Roth IRA. This can be a viable option because the Roth, unlike

a traditional IRA or 401(k), enables you to

withdraw your contributions at any time and for any reason prior to age 59 1/2. Under a best-case scenario, the assets in your Roth would increase until you began withdrawing them in retirement. But if you lost your job, you could with- draw your Roth contributions if you needed the money to cover living expenses.

The key drawback to this approach is that ideally, you’d hold any assets you have earmarked for your emergency fund in something safe, such as a money market fund or CD. But those safe investments have very low long-term return poten- tial, making them inappropriate if your goal is long-term growth for retirement.

5. Set up additional safety nets

Finally, while emergency funding is on your mind,

investigate additional safety nets that you could turn to if you’ve exhausted your emergency assets. For example, check to see whether your company’s retirement plan allows for loans. Because you’ll pay interest to yourself rather than a bank when you take a 401(k) loan, tapping these assets is preferable to turning to a bank loan or credit card if you find yourself in a financial bind. (The key downside, of course, is that you’re short-shrifting your own retirement savings.)

Obtaining a home equity line of credit may also make sense for homeowners who have built up substantial equity in their properties. The key to making this strategy work is to use the HELOC only in case of a true financial emergency and after you’ve exhausted other types of funding, rather than to cover discretionary expenditures such as cars and vacations.

Making Your Investment Policy Statement

An investment policy statement is critical to keeping your investment portfolio on course to meet its goals even when the market and your emotions are telling you to run for the hills.

By Christine Benz Director of Personal Finance Morningstar.com

One of my favorite segments on National Public Radio was “This I Believe,” a series of spoken essays in which individuals articulated the beliefs that helped shape their lives. The essays, based on a 1950s radio program hosted by Edward R. Murrow, included thoughts about birth and death, baseball, and driving. Big names like Muhammad Ali and John Updike contributed essays to “This I Believe,” as did school teachers and attorneys. The series consistently demonstrated the value of having an overarching set of beliefs that can help you navigate tumultuous times.

Think of your investment policy statement as your own, investment-related version of “This I Believe.” In it, you’ll articulate the key reasons why you’re investing, what you’re hoping to gain from your investments, whether you’re on track to meet your goals, and whether any changes are in order. Once you’ve created one, you can use your investment policy statement as your com- pass, a check to keep your investment portfolio on course to meet its goals even when the market and your emotions are telling you to run for the hills. Referring to your investment policy statement before you make any investment decisions can help ensure that you’re investing with your head, not your gut.

Corporations and big institutional investors like pension plans create elaborate, 20- page investment policy statements. However, you needn’t hire a consultant to develop your investment policy statement, and you don’t have to use consultant-ish terms like “Executive Summary” and “Reporting Require-

ments,” even though they appear in a lot of invest- ment policy statements prepared by the pros.

In fact, I think the best investment policy statements for individuals are fairly stripped down and written in plain English; that way, you’ll be able to easily identify the things that you should be focusing on.

If you have separate investment portfolios geared toward different investment goals—for example, you have your own retirement assets that you expect to tap in 20 years as well as a college savings plan for your 15-year- old—you may find it helpful to create separate investment policy statements for each sleeve of your portfolio. Don’t get too carried away, though. By getting too complicated and crea- ting too many sleeves of your portfolio, you risk getting bogged down in paperwork and missing the big picture about whether your invest- ments are on track to get you to your goals.

Step 1 Download and print Morningstar.com’s Investment Policy Statement worksheet to use as your template. Start by writing down your key investing goal and the year in which you hope to reach it. If it’s a goal that you will pay for over a number of years, such as retirement or college, fill out the Duration field. Of course, when it comes to retirement, filling out this field means quantifying your own longevity. That’s tricky, but the actuarial tables on the actuarial tables can help you arrive at a reasonable estimate. From there, I think it’s helpful

to be optimistic and assume even greater longevity:

Add at least a few years.

Step 2 To the extent that you can, quantify how much your goal will cost. If you have a financial goal that’s more than a year or two away, it’s important to adjust the cost upward to reflect what you’ll actually pay once inflation is factored in. That gets even more complicated for goals you expect to fund over several years, such as retirement or college.

Step 3 Go online or refer to your most recent statements to arrive at the current value of the investment assets you have earmarked for that specific goal. Also indicate how much you plan to invest toward this goal on an ongoing basis.

Step 4 Next, document your asset allocation targets for these investments.

Because your portfolio’s asset allocation will ebb and flow based on how stocks are performing versus bonds and cash, your investment policy statement should set a range for your asset alloca- tion rather than targeting a static figure for each asset class. After all, you don’t want to have to make changes to your portfolio just because stocks went up 5% over the past month; that kind of trading can be costly and time-consuming. (For tips on formulating a target asset allocation, see the article “Find the Right Stock/

Bond Split,” which is included on pg. 13 of this special report.)

For the broad asset classes, a range of 10 percent- age points (or even 15 or 20 percentage points

if you’d like to be a hands-off investor) is reason-

able. For example, say your asset allocation target for your retirement portfolio is 55% stock, 40% bonds, and 5% cash. In your investment policy statement, you’d set out the ranges as follows:




Stocks: 50% to 60%

Bonds: 35% to 45%

Cash: 0% to 10%

Some investment policy statements include sub- asset-class breakdowns, setting parameters

for large-, mid-, and small-cap stock exposure; you can also break out U.S. and foreign stock exposure. There’s nothing wrong with that, but you don’t need to get too fancy. Setting your exposure to the broad asset classes and keeping your portfolio in line with those parameters

is most important.

Step 5

Based on your asset allocation parameters, project

a rate of return for your portfolio. That will

require you to forecast rates of return for various asset classes, a task that’s certainly more art than science. I like to be conservative and assume

a 6% return for stocks, a 4% return for bonds, and a 2% rate of return for cash.

If your account consists of some combination of stocks, bonds, and cash (and you assume the

forecasted rates of return I just laid out), you’ll need to come up with a combined expected return. For example, if your accounts consist of 10% cash, 50% bonds, and 40% stocks, you’d calculate the expected return as follows: 2.4% return from the stock portion of your portfolio (6% x .40), 2.0% return from the bond portion of your portfolio (4% x .50), and 0.2% return from the cash portion of your portfolio (2% x .10). The aggregate expected return for such a portfolio would be 4.6% (2.4% + 2.0% + 0.2%).

Step 6 Next, document what you’re looking for in your individual investments: the criteria you used when you selected the securities in your portfolio and what you’ll use to judge them on an ongoing basis.

Some worthwhile criteria for do-it-yourselfers include:








No-load funds only

Expense ratios of less than 1% for stock funds, less than 0.75% for bond funds

Manager tenure of more than five years

Holds up well in down markets

Average credit quality of A or better (for bond funds)

History of good tax efficiency (for investments you hold in your taxable account)

Long-term (10-year or more) returns in top half of peer group or beating appropriate market- benchmark

Step 7 Once you’ve set your asset allocation parameters and your criteria for individual security selection, your next step is to specify how often you’ll check up on your portfolio and when you’ll make changes. In my experience, less is usually more when it comes to checking up on your hold- ings and your portfolio’s performance.

Semiannual or quarterly (at most) portfolio checkups are more than adequate. When it comes to making changes, I’d recommend doing so when your checkups indicate that your portfolio’s allocations to the broad asset classes have diverged from your target by 5 or 10 percentage points or more.

Step 8 The final step in creating an investment policy statement is to specify what your checkups will consist of and how you’ll evaluate whether you’re on track to meet your goals.

You can do so in a few separate ways:





Monitor individual holdings versus the criteria you laid out in Step 6.

Monitor portfolio’s asset allocation versus target allocation. (This will be the main trigger for your rebalancing efforts.)

Monitor individual holdings’ performance versus a style-appropriate benchmark.

Monitor aggregate performance of holdings within an asset class versus a benchmark geared toward that asset class (for example, all U.S. stock funds’ performance versus a broad-market





benchmark like the Dow Jones Wilshire

500 Index).

Monitor entire portfolio’s performance versus

a blended benchmark. For example, say your

portfolio’s asset-allocation target is 55% stocks and 45% bonds. You can benchmark your portfolio versus a blended portfolio consisting of

Monitor portfolio’s rate of return versus the pro- jected rate of return you articulated in Step 5.

Monitor assets accumulated versus your goal.

Side Notes



If you’re familiar with investment policy state-

ments, you know that they often include

a couple of features that I’ve omitted here. For

starters, they often articulate an investor’s assessment of his or her own risk tolerance. In reality, however, most investors are very

poor judges of their own ability to tolerate risk; when stocks are going up they rate their risk tolerance as very high, but when every thing’s going down, they feel more conservative. Because it’s not very useful, I didn’t include risk tolerance here.

Many investment policy statements also focus on performance, setting out rigid parameters such as “fund must be in top half of peer group over trailing three-year period.” I think that, too, is misguided, because most investments lag their peer groups from time to time, and short- term underperformance can have a big effect on

a holding’s longer-term numbers. To the

extent that your investment policy statement mentions performance, it should be very long-term.

Find the Right Stock/Bond Mix

Asset allocation is the biggest determinant of how your portfolio behaves.

By Christine Benz Director of Personal Finance Morningstar.com

With your budget locked down and your emergency fund squirreled away, it’s time to turn to your investment strategy. Before you begin picking indi- vidual investments, it’s important to set the right strategy at the portfolio level. (See “Making Your Investment Policy Statement,” which is included on pg. 9 of this special report.)

Part of this planning involves thinking about your asset allocation—that is, your mix of invest- ment types. Arguably, the most important decision in this respect is how much you will put

At the opposite end of the spectrum would be an investment broker whose income depends completely upon the stock market. When the market is going up and the broker’s clients are clamoring to invest, her commissions are high and she may also earn a bonus. But when the market is down, so is her income, and her bonus may be nonexistent. She’s a stock. She’d want to hold much more in bonds than stocks, because her earnings are so dependent on the stock market.


equities versus fixed income.

Just as our career paths affect how we view our own human capital, so do our ages. When you’re


good way to start thinking about that decision is

young and in the accumulation phase, you’re


ask yourself: Are you a stock or a bond?

long on human capital and short on financial capi-

You may not be accustomed to comparing yourself

tal—meaning that you have many working years ahead of you but you haven’t yet amassed


a financial security, but it may be useful

much in financial assets. Because you can

when you’re trying to figure out your portfolio’s optimal stock/bond mix.

expect a steady income stream from work, you can afford to take more risk by holding equities.

The thinking goes like this: If your own earnings power—which Morningstar company Ibbotson Associates calls “human capital”—is very stable and predictable, then you’re like a bond. Think of a tenured college professor, whose income is secure for the rest of his

As you approach retirement, however, you need to find ways to supplant the income that you earned while working. As a result, you’ll want to shift your financial assets away from equities and into income-producing assets such as bonds, dividend-paying stocks, and income annuities.

life, or a senior who’s drawing upon a pension from

a financially stable company. Because such

an individual has a predictable income, he could keep a larger share of his portfolio in stocks than someone with less stable human capital. He’s a bond.

Of course, there are no guarantees that stocks will return more than bonds, even though they have done so during very long periods of time. In fact, in the 10 years from December 2001 through- December 2011, stocks eked out only about a 3% gain, on average, whereas bondholders gained an average of about 6% per year and endured

much less volatility. Against that backdrop, it might be tempting to ignore stocks altogether.

At the same time, however, it stands to reason that during very long periods of time, various asset classes will generate returns that compensate investors for their risks. Because investors in stocks shoulder more risk than bondholders, and bond- holders take on more risk than investors in ultrasafe investments such as certificates of deposit, you can reasonably expect stocks to beat bonds and bonds to beat CDs and other “cash”-type invest- ments during very long periods of time. In turn, that suggests that younger investors with long time frames should have the majority of their invesments in stocks, whereas those who are close to need- ing their money should have the bulk of their assets in safer investments such as bonds and CDs.

What I’ve discussed so far is called strategic asset allocation—meaning that you arrive at a sen- sible stock/bond/cash mix and then gradually shift more of your portfolio into bonds and cash as you get older. Of course, it would be ideal if we could all position our portfolios to capture stocks’ returns when they’re going up and then move into safe investments right before stocks go down. In reality, however, timing the market by, say, selling stocks today and then buying them back at a later date is impossible to pull off with any degree of accuracy—so much so that most professional investors don’t try it.

Maintaining a fairly stable asset allocation has a couple of other big benefits: It keeps your portfolio diversified, thereby reducing its ups and downs, and it also keeps you from getting whipped around by the market’s day-to-day gyra- tions. An asset-allocation plan provides your portfolio with its own true north. If your portfolio’s allocations veer meaningfully from your targets, then and only then should you make big changes.

To find the right stock/bond mix, you’ll need:




A list of your current investments

An estimate of the year in which you plan to retire.

Start the Clock Step 1 Before determining a target asset allocation, start by checking out where you are now. Log on to Morningstar’s Instant X-Ray tool. Enter each of your holdings, as well as the amount that you hold in each. (Don’t include any assets you have earmarked for short-term needs, such as your emer- gency fund, which is covered on pg. 6 of this special report.) Then click Show Instant X-Ray. You will be able to see your allocations to stocks (both domestic and international), bonds, cash, and “other” (usually securities such as convertibles and preferred stock), as well as your sector and investment-style positioning.

Step 2 The next step is to get some guidance on where you should be. Find the asset allocation in this document that corresponds to your anticipated retirement date. Remember, this allocation corresponds to your long-term goals (for example, retirement assets), not your emergency fund or any shorter-term savings that you’ve earmarked for purchases that are close at hand.

Step 3 The allocations in the document mentioned above are a good starting point, but you can further fine-tune your asset allocation by asking yourself the following questions:

Are you expecting other sources of income during retirement, such as a pension? Yes: More equities No: Fewer equities

Does longevity run in your family? Yes: More equities No: Fewer equities

Are you expecting to need a fairly high level of income during retirement? Yes: More equities No: Fewer equities

Have you already accumulated a large nest egg? Yes: Fewer equities No: More equities

Is your savings rate high? Yes: Fewer equities No: More equities

Is there a chance that you’ll need to tap your assets for some other goal prior to retirement? Yes: Fewer equities No: More equities

Do you want to leave assets behind for your chil- dren or other loved ones? Yes: More equities No: Fewer equities

If still working, are you in a very stable career with little chance of income disruption? Yes: More equities No: Fewer equities

Next Step The Internet is chock-full of worthwhile tools to help you arrive at an appropriate asset allocation. If you’ve saved your portfolio in Morningstar.com’s Portfolio Manager, our Asset Allocator tool can help you optimize your current portfolio’s asset mix to give it a better shot at reaching your financial goals. T. Rowe Price’s Retirement Income Calculator provides another way to see whether you’re on track to meet your retirement income goals.

Three Core Stock Funds You Don’t Have to Babysit

How to home in on worthy linchpin holdings.

By Christine Benz Director of Personal Finance Morningstar.com

If you’re seeking sturdy core stock funds to anchor your portfolio, one quick shortcut is to use Morningstar.com’s Premium Fund Screener to focus on stock mutual funds that our analysts have designated as both “core” and that receive high Analyst Ratings (Gold, Silver, or Bronze).

The core assignment means that a fund is well- diversified and could reasonably serve as an investor’s anchor—or only—equity holding. The forward-looking Analyst Rating, meanwhile, lets you know that a fund has been pre-vetted by our analyst team to ensure that it has a sensible investing process, strong management, and good stewardship (including low costs).

Premium Members can also customize their screens to emphasize those factors they deem most important. Because most people have better things to do with their time than stand and watch over their investments, I favor funds that allow you to “set it and forget it.”

To help home in on funds that fit the bill, I started by searching the universe of core funds for those with below-average costs and managers who have been on the job for at least five years. I also added a few screens to help ensure that a fund wouldn’t stoke investors’ worst instincts to buy and sell at inopportune times. I looked for funds with below-average risk scores, because Morningstar’s Investor Return data find a notable correlation between volatility and poor dollar-weighted returns.

Because Morningstar’s risk rating is a backward- looking measure, I layered on an additional criterion to help identify investments that would also be low-risk in the future—average economic moat ratings of moderately wide or higher. Morningstar’s data have consistently dem- onstrated that wide-moat stocks and funds tend to hold up better on the downside than narrow- or no-moat companies.

Below, I’ve provided details on the funds from my “no babysitter required” list.

The Primecap management team in charge of this and several other funds, including Van-

Core VPCCX, is best known for its contrarian growth approach. The five managers often buy companies with strong growth characteristics when they’re in a trough and ride them up as they rebound; the health-care and technology sectors have long been favorite hunting grounds. Of the six funds run by the Primecap team, this offering is the most “core-like,” according to analyst David Kathman, with a bigger emphasis on large- and giant-cap stocks than most of its sib- lings. That, plus its limited reliance on cyclical firms, has helped it hold up well in periods when investors have fretted about the strength of the economy. Even as the S&P 500 held up better than many actively managed funds during 2011’s rough patches, this fund lost even less. It also fared (rela- tively) well in 2008.

Jensen Quality Growth JENSX This fund recently added the words “Quality Growth” to its name, but nothing else has changed here, including personnel and strategy. The fund continues to hold only highly proven compa- nies—they had to have generated at least a 15% return on equity, or ROE, for 10 consecutive years, in addition to possessing other traits such as appealing valuations. This fund’s relatively mild volatility and steady returns make it a fine core holding, while its ultralow turnover makes it a good choice for taxable accounts. And although the management team has seen a couple of retirements in recent years, it still boasts plenty of experience and depth.

T. Rowe Price Dividend Growth PRDGX This fund keeps it simple. Like many managers, Tom Huber looks for reasonably priced companies with competitive advantages. He targets dividend payers that are financially healthy enough to boost their payouts over time. However, Huber isn’t solely focused on yield; he will sacrifice high payouts for growth in some cases. The overall result of Huber’s process is a temperate portfolio that’s kept the fund resilient in down markets. It fared better than the majority of its large-blend peers during the 2007-09 bear market. And it performed similarly during the market sell-off in 2011’s third quarter, losing less than 85% of its peers. Such steady long-term results and low volatility have made the fund easy for investors to own.

How to Find the Best Core Bond Funds

Tips for those getting their feet wet in fixed-income investing.

By Christine Benz Director of Personal Finance Morningstar.com

For the core fixed-income fund holdings in most investors’ portfolios, bond funds with short- and intermediate-term durations—ranging up to about 7 years—are the way to go. They’re less volatile than longer-duration funds and offer nearly as much return.

And just as most investors would do well to select bond funds with low to moderate interest- rate sensitivity for their core fixed-income holdings, we’d urge you to take a similarly moder- ate tack when it comes to credit quality. Although you needn’t stick with Treasury-bond funds for the whole of your fixed-income portfolio (the U.S. government is one of the most creditworthy issuers around, but Treasury yields also tend to be lower than any other bond type), we would suggest putting the bulk of your bond portfolio—say, 75% or more—into funds with investment-grade ratings or better.

Morningstar’s intermediate-term bond category— which tends to encompass broadly diversified bond funds that don’t take on extreme credit-quality or interest-rate risk—is an ideal place to start for most investors looking for a core fixed-income fund. Most of the top-tier bond shops, including PIMCO, Vanguard, Fidelity, Dodge & Cox, and Metropolitan West, have sturdy intermediate-term bond funds as their family flagships.

For investors who are saving for a goal that’s close at hand, Morningstar’s short-term bond category is a good place to look for core bond exposure. Vanguard and Fidelity both man-

age topnotch short-term funds that could serve as worthy core holdings for investors seeking

to limit interest-rate-related volatility. We’d

also recommend that investors—and not just those

in the very highest tax brackets—investigate

whether municipal-bond funds make sense for their portfolios.

When you’re looking for a bond fund, pay special attention to the following pointers.

Look for Low Costs

A penny-pinching mentality is a must when eval-

uating bond funds. Because bonds typically return less than stocks over the long haul, their costs become a heavier burden.

As if high expenses cutting into your returns weren’t bad enough, high-cost bond funds are often riskier than low-cost bond funds. Expenses get deducted from the yield the fund pays to its share- holders, so managers of high-cost funds may do hazardous things to keep their yields competitive with cheaper funds, such as buying longer-dura- tion or lower-quality bonds or taking on leverage. In doing so, they increase the fund’s risk. Managers with low expense hurdles, in contrast, can offer the same yields and returns without taking on extra risk. Plenty of terrific bond funds carry expense ratios of 0.75% or less.

Focus on Total Return, Not Yield

If you’re looking for income in retirement, it’s natu- ral to focus on yield—it tells you something about the size of the checks you’ll get when the

fund makes its regular income distributions. But chasing yield can have its penalties. Some funds use accounting tricks to prop up their yields while at the same time your principal value, or net asset value, may be declining. Others focus on yield without enough regard for the down- side. Higher-yielding but lower-quality bonds can get crunched in recessionary environments, for example. And even though longer-duration bonds typically have higher yields than inter- mediate and short-term bonds, they’re also more vulnerable to interest-rate changes.

Instead of judging a bond fund by its yield alone, evaluate its total return: its yield plus any capital appreciation (capital appreciation comes from bonds increasing in value if interest rates change) plus compounding of those gains over time. Yield will be the lion’s share of a bond fund’s return; you just want to be sure that the fund isn’t cutting into NAV to produce that yield. Funds with superior long-term returns relative to other funds in their peer group will be your best bet.

Seek Some Variety You wouldn’t choose a fund that buys only health- care stocks as your first equity fund, so why should your first (and perhaps only) bond fund be a narrowly focused Ginnie Mae fund? (Ginnie Mae funds focus on bonds backed by mortgages that the Government National Mortgage Association has guaranteed.) Yet many investors own bond funds that buy only government bonds, or Treasuries, or mortgages. For your core

bond exposure, consider intermediate-term, broad-based, high-quality bond funds that hold both government and corporate bonds. You can get higher total returns plus the stability that diversifi- cation affords.

Determine if Municipal-Bond Funds Are Right for You If you’re in one of the higher tax brackets, you might consider municipal-bond funds, whose income is exempt from federal income taxes, for the core of your bond portfolio. States, cities, munici- palities, and county governments issue municipal bonds, or muni bonds, to raise money. They use the proceeds to improve roads, refurbish schools, or even build sports complexes. The bonds are usually rated by a major rating agency, such as Standard & Poor’s or Moody’s, based on the quality of the issuer. Unlike income from bonds issued by corporations or the federal govern- ment, income from municipal bonds is exempt from federal and often state income taxes if you happen to live in the same state as the state issuing the bond. So when examining a municipal bond’s yield, it’s important to take the implicit tax advantage into account. Muni bonds usually pay lower rates specifically because of their tax benefits. (Their yields are even higher once you factor in the tax savings.)

You don’t need to be in a tax bracket that would allow you to drive a Jaguar or to shop rou- tinely at Neiman Marcus for the tax-protected income from a muni fund to be a good deal for you. That’s because income from taxable bonds,

unlike dividends or capital gains that you might earn from your stocks or stock funds, is taxable at your ordinary income rate. So if you can save on your bond funds’ tax bill by buying munis, your take-home return will be that much higher. Morningstar.com’s Bond Calculator includes a func- tion that lets you compare the aftertax yield on a taxable fund with that of a municipal fund, based on your tax bracket.

Some Favorite Core Bond Funds Looking for some individual fund picks? I recently sat down with Morningstar’s director of fixed- income research Eric Jacobson, who offers up some of his favorite choices in a Morningstar.com video report. Click here to watch nowa full transcript of the conversation is included.

The Right Investments for Short-Term Goals

Short-term investments must strike the right balance between return potential and loss aversion.

By Christine Benz Director of Personal Finance Morningstar.com

Q: My wife and I are both in our late 20s, and we’ve been trying to save in our retirement accounts. But we’d also like to buy a house within the next five years. What types of invest- ments are appropriate? Should we just keep the money in cash, or can we take a little extra risk with an eye toward earning a higher return?

A: Any time you’re saving for a goal that’s close at hand, it’s worthwhile to spend a few

moments anchoring your decision-making in the num- bers, and perhaps doing a little soul-searching as well.

Morningstar’s Asset Allocator tool (available to Premium Members) can help you with the former task, allowing you to gauge the probability that you’ll reach your financial goals given your investment mix, how much you’ve saved thus far, additional contributions per month, and the number of years you have to save and invest. You can then adjust the variables to improve the likelihood that you’ll hit your financial goal.

For example, say you’d like to save up $25,000 for a down payment in five years, and you’ve already saved $10,000 and plan to kick in an addi- tional $250 per month. If you hold all of your assets in low-yielding cash, Asset Allocator pegs the likelihood that you’d hit your goal at about 75%. That’s not too bad. But forgoing the stability of cash and holding a bond-only portfolio improves the probability of success to 80%. Taking the portfolio to a 100% equity allocation takes your probability of success back down to 75%. Your return potential has gone up, but so has the potential for losses.

By tinkering with the asset mix, you can arrive at the allocation to cash, bonds, and stocks that gives you the optimal probability of hitting your goal given your time horizon and savings rate. In the case of my example above, the sweet spot appears to be a portfolio with about half its assets in cash, 35% in bonds, and a small slice (roughly 15%) of large-cap stocks. (Note that adding international and small- and mid-cap stocks to the portfolio doesn’t improve its probability of success in a meaningful way.)

Of course, finding the right investment mix will also hinge on your own risk capacity, how flexible you are about your goal, and how willing you are to ratchet up your own savings rate if it means greater peace of mind. Are you set on having your down payment in hand five years from now and don’t want to risk the chance that your invest- ments will be at a low ebb when you need the money? If so, you’ll want to err on the side of

a more conservative asset mix, even if it reduces the likelihood that you’ll earn substantially

more than your goal amount. If, on the other hand, you’re willing to defer your house-buying date

if it gives you a shot at amassing a larger down

payment, you can tweak the asset allocation to make it slightly more aggressive. Just don’t go overboard with equities; taking your stock allocation much higher than the 15% allocation that Asset Allocator recommended in the example above will subject a short-term portfolio to bigger short-term fluctuations than is ideal.

Armed with a ballpark asset allocation, you can then turn to selecting specific investments.

Morningstar doesn’t provide ratings or data for cash instruments, but you can hop onto bankrate.com to shop around for certificates of deposit and money market funds with attractive yields. (If you opt for a money market fund, just be sure that its costs are nice and low—ideally, well less than 0.5%.)

For the bond component of the portfolio, you could keep it simple and go with a broadly diversified

Index VBMFX is another broad-based option.

If you’re more conservative and/or worried about rising bond yields, you could split your fixed- income weighting between an intermediate-term fund like the aforementioned offerings as well as a short-term bond fund. (Vanguard Short-

Short-Term Bond PRWBX are two of Morningstar analysts’ favorites.)

To the extent that you hold a sleeve of your short-term portfolio in stocks—and that’s optional, especially for conservative types—focus on high-quality large-cap funds such as Vanguard

Rebalancing Made Simple

A step-by-step guide to restoring your asset allocation.

By Christine Benz Director of Personal Finance Morningstar.com

Once you have your investment strategy formulated, and your investment vehicles selected, you’ll need to periodically check in on your holdings to ensure you’re maintaining the balance of assets that you targeted in your investment policy statement. (For more information on this, see “Making Your Investment Policy Statement,” which is included on pg. 9 of this special report.) Strength or weakness in certain assets, such as stocks, may lead to those securities taking up more, or less, of your total portfolio, even if you haven’t changed how you are directing your new investment dollars.

If you’ve put off rebalancing because the process seems daunting to you, read on. The following step-by-step guide simplifies the task using tools on Morningstar.com.

Step 1: Determine your asset-allocation targets. Your first step in the rebalancing process is to make sure you have an asset-allocation framework. If you had a stock/bond target that made sense for you before the recent market downturn, it should still fit now. And if you don’t have an asset- allocation plan, it’s time to make sure you have one. My favorite “quick and dirty” method of getting in the right asset-allocation ball- park is to look at the asset allocations of target-date mutual funds geared toward individuals in your age range. Of course, there are no one-size- fits-all asset-allocation solutions—none of us knows how long we’ll live, for one thing. These funds also vary widely in their asset allocations

and in their overall quality. But I still think the stock/bond mixes of the Vanguard Target (middle-of-the-road asset allocations) and T. Rowe Price Retirement funds (more aggressive asset allocations) can be a good starting point for your asset-allocation framework.

The web is also full of tools and questionnaires to help you with asset allocation. Morningstar’s Asset Allocator tool, part of our Premium Mem- bership, is one way to help optimize your asset mix. If you have a portfolio in Morningstar.com’s Portfolio Manager (more on this in Step 2), the tool helps you find the best combination of holdings to meet your goals. The article “Find the Right Stock/Bond Mix,” which is included on pg. 13 of this special report, also discusses some key variables to consider when arriving at an asset- allocation plan.

Step 2: Find your current asset allocation. After you’ve determined what your optimal asset allocation should be, it’s time to take a look at where you are now. Gather up your recent invest- ment statements or go online for an even more current view of your portfolio, then take note of your current asset allocation.

Keeping track of your portfolio’s asset allocation by hand can be a bit cumbersome and inexact, particularly because most mutual funds aren’t pure stock or bond. It’s not uncommon for stock funds to hold double-digit cash stakes, for example. For the clearest possible read on your asset allocation, I recommend Morningstar.com’s X-Ray

tools, which drill into each of your fund hold- ings to determine how they’re allocated by asset class and investment style. If you store a Transaction portfolio on Morningstar.com, simply click on the X-Ray tab view within Portfolio Manager to see your current split among cash, U.S. and foreign stocks, bonds, and other. The X-Ray tab also depicts how your holdings are dispersed across the Morningstar Style Box.

If you haven’t yet stored your portfolio on Morningstar.com, click on the Instant X-Ray tool, found in Morningstar.com’s Tools Center. Once in Instant X-Ray, enter the ticker for each of your holdings as well as the dollar amount you hold in each. Then click “Show Instant X-Ray” for your asset allocation. (If you want to refer back to this portfolio at a later date, click Save Instant X-Ray Holdings as a Portfolio, then follow the prompts.) Take note of your current asset allocation and compare that with your asset- allocation targets in Step 1. Determine where you need to add and subtract to restore your portfolio to your target levels.

Step 3: Identify candidates for tax-loss selling. Before you begin altering your portfolio to put your asset allocation back in line with your targets, you also want to scout around for tax-loss candi- dates that you hold in your taxable accounts. (Learn more about the basics of tax-loss selling in this recent Morningstar.com article, and this column discusses whether it makes sense to realize a loss in your IRA.) Given the volatility we’ve seen in the market recently, you likely won’t have to look

too hard to identify securities that are now priced more cheaply than what you paid for them.

Step 4: Formulate a rebalancing plan. If your portfolio is in line with your target asset allocation and you’re not making any inadvertent style or sector bets, your work is done.

Most likely, however, your analysis of your current asset allocation versus your targets indi- cates that changes are in order. At the same time, the securities that you’ve identified for tax- loss selling are also likely to be stocks and stock funds. If you’re in the market for high-quality stock funds to consider for your portfolio, check out “Three Core Stock Funds You Don’t Have to Babysit,” which is included on pg. 16 of this spe- cial report, or peruse Morningstar.com’s list of ETF Analyst Picks. If individual stocks are part of your portfolio plan, Premium users can screen for those companies with high star ratings on Morningstar.com.

When it comes to deciding which securities to add, as well as how much to add to each, you’ll probably find that the process of overhauling your portfolio is a matter of trial and error. Here again, I’d recommend Morningstar’s Instant X-Ray tool to help you evaluate the impact of various holdings on your asset-allocation mix before you decide to buy. Also, pay attention to the impact that various holdings have on your style-box positioning and sector weightings. Your stock portfolio doesn’t need to be an exact clone of the broad market, but you should at least be aware

of whether your portfolio is skewing heavily to one style or sector.

In some cases, the alterations you need to make are obvious—if you’re heavy on bonds, for example, adding to stocks should resolve the problem. Getting to the bottom of other bets might take a little more research. For example, if your portfolio has more cash than you want it to, that could be because one of your stock-fund managers is holding a lot of cash. You could decide to live with it, and reduce your designated cash holdings accordingly, or else pare back your holdings in the cash-heavy stock fund.

It also pays to consider tax consequences when rebalancing. Conventional wisdom holds that you should concentrate your rebalancing efforts in your tax-sheltered accounts, because you won’t have to pay capital gains tax if you determine you need to sell shares. Alternatively, you could try to correct your portfolio’s imbalances not by selling but by directing a bigger share of future contributions to those holdings that need beefing up. In so doing, you’ll save on tax and transaction costs.

Step 5: Plan to make a habit of it. There are two ways to rebalance—either you can rebalance on a set schedule, say, every December, or you can rebalance whenever your portfolio gets dramatically out of whack with your targets. My advice is to split the differ- ence. While I think it makes sense to give your portfolio a thorough review once a year, you don’t want to get into the habit of trading too frequently. Schedule a top-to-bottom portfolio

review at a fixed time each year, but rebalance only if your portfolio’s allocations have gotten dramatically out of whack with your targets.

Avoid These Four Investment Mistakes

A growing field of study can save you from your worst instincts.

By Morningstar.com


The idea that investor psychology can result in poor investment decisions is a key insight of an increasingly influential field of study called behav- ioral finance. Behavioral-finance theorists blend finance and psychology to identify deep- seated human traits that get in the way of investment success. Behavioral finance isn’t just an interesting academic diversion, however. Its findings can help you identify—and correct— behaviors that cost you money.

What commonplace mistakes should investors avoid? Here are a few key behavioral-finance lessons worth heeding.

Don’t Read Too Much Into the Recent Past When faced with lots of information, most people come up with easy rules of thumb to help them cope. While useful in some situations, these shortcuts can lead to biases that cause investors to make bad decisions. One example is “extrapolation bias,” the overreliance on the past to assess the future. Instead of doing all the necessary and possibly tedious homework in researching a potential investment, investors instead “anchor” their expectations for the future in the recent past.

The problem, of course, is that yesterday does not always tell you what tomorrow will bring. If you don’t believe us, just ask investors who swarmed red-hot technology- and Internet-focused stocks in 1999 and 2000 expecting the good times to con- tinue, or those who bought overpriced real estate in the mid-2000s with the expectation that “home

prices always go up.” They didn’t, in many cases, and some people suffered huge losses.

That’s worth keeping in mind if you’re drawn to the strong performers of recent years, whether it’s emerging markets or precious metals. The recent volatility in those areas is a reminder that the past is no guarantee of future performance.

As Wall Street Journal columnist Jason Zweig has said, “Whatever feels the best to buy today is likely to be the thing you’ll regret owning tomorrow.” Morningstar’s investor returns show this phenomenon at work. Investors tend to pour money into funds after they’ve perfor- med well and rush for the exits after they underper- form, resulting in much lower returns (or even losses) for average investors compared with funds’ reported returns.

Realize That You Don’t Know as Much as You Think In a 1981 study asking Swedish drivers to assess their own driving abilities, 90% rated them- selves as above average. Statistically speak- ing, that’s just not possible. But most of us are just like the Swedes: We think we’re more capable and smarter than we really are. As an investor, you should check your excessive optimism at the door. You might believe you’re more likely than the next guy to spot the next Microsoft MSFT, but the odds are you’re not.

According to several studies, overconfident inves- tors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be “hazardous to your wealth,” as University of Cal- ifornia, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behavior. The study looked at approximately 66,000 households using a dis- count broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualized return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.

All that trading might have been worthwhile if investors replaced the stocks they sold with something better. But interestingly, the study found that, excluding trading costs, newly acquired stocks actually slightly underperformed the stocks that were sold. That means that rapid traders’ returns suffered whether or not fees were taken into account. Some researchers have come to a similar conclusion studying fund manager trading—standing pat is often the best strategy.

If you constantly check your portfolio, you may be tempted to take action at the slightest hiccups in your holdings or in the market. Limit the number of times you even look at your portfolio; a checkup once or twice a year will be plenty for most investors. That will help you stay disciplined and will save you money on transaction fees.

Keep Your Winners Longer and Dump Your Losers Sooner Investors in Odean and Barber’s study were much more likely to sell winners than losers. That’s exactly what behavioral-finance theorists would predict. They’ve noticed that investors would rather accept smaller but certain gains than take their chances to make more money. On the flip side, investors are reluctant to admit defeat and sell stocks that are underwater in hopes of a rebound. As a result, investors tend to sell their winners too early and hang on to their losers for too long.

That’s why it pays to have clear reasons in mind for your purchase of any investment right from the get-go. If your expectations don’t pan out, then it’s time to sell. Crafting an investment policy statement that lays out basic parameters for your portfolio and what you’re looking for in individual securities is a key way to instill discipline in your financial decision-making process. (The article “Making Your Investment Policy Statement,” which is included on pg. 9 of this special report, provides the basic steps for creating your investment policy statement as well as a template you can use to craft your own.)

Periodically rebalancing—but not too often— is another way that investors can avoid mental mis- takes when buying and selling. Rebalancing involves regularly trimming winners in favor of lag- gards. That’s a prudent investing strategy because it keeps a portfolio diversified and reduces risk; it ensures that you periodically harvest your profitable holdings. But rebalancing too

frequently could limit your upside. Instead, rebal- ance only when your portfolio is out of whack with your target allocations. Minor divergences from your targets aren’t a big deal, but when your current allocations grow to more than 5 or 10 percentage points beyond your original plan, it’s time to cut back. The article “Rebalancing Made Simple,” which is included on pg. 23 of this special report, discusses rebalancing in depth.

Avoid Compartmentalization One other key mental mistake is focusing

on individual securities in isolation rather than look- ing at your portfolio as a whole. If you’re adequately diversified overall, your portfolio won’t exhibit big swings on a day-to-day basis. But individual holdings can and will gyrate around quite a bit, and that could lead you to focus

a disproportionate amount of time and energy on

certain positions at the expense of the big picture.

To help stay focused on how you’re really doing rather than paying undue attention to one or two holdings, it can be useful to view your port- folio in aggregate by using a tool like Morningstar. com’s Portfolio Manager. If you already have multiple portfolios on the site—for example, one for your IRA and one for your company retire- ment plan—you can also collapse them into one large portfolio. Simply click “Combine” from the “Create” menu.

It’s All About Discipline

Fortunately, you don’t have to be a genius to be

a successful investor. As Berkshire Hathaway

BRK.B chief and investor extraordinaire Warren

Buffett said in a 1999 interview with Business Week, “Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” It’s true that not everyone is gifted with Buffett’s calm, cool demeanor. But challenging yourself to avoid your own worst instincts will help you reach your financial goals.

More Insights on Investor Behavior In a recent Morningstar.com video report, Pat Dorsey, Morningstar’s former director of equity research, offers additional tips for identifying and overcoming mental pitfalls. Click here to watch nowa full transcript of the conversation is included.