GETTING STARTED Growing a Fund Portfolio Demystifying the Mutual Fund Why Mutual Fund Expenses Matter The ABCs of Mutual Fund Share Classes MORE... FUND TOOLS Kiplinger's Mutual Fund Finder How much do fees affect my return on my fund? Which is better: load or no load? How do growth and income funds compare? What is my return if I sell my fund now? Which fund is better? Recent Columns Seven Stocks to Appreciate - Feb. 1, 2005 Best Supporting Actors - Jan. 25, 2005 Funds in Motion Stay in Motion - Jan. 18, 2005 Five Small-Caps for Every Investor - Jan. 11, 2005 Midwestern Values - Jan. 4, 2005 Blue Chips Are Back for 2005 - Dec. 28, 2004 MORE ...

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Build a Top-Notch Fund Portfolio
by Steven Goldberg

Picking good funds (or stocks) is one part of being a successful investor. But even more important is putting those funds together into bullet-proof portfolios that will afford some protection no matter what the market does.

That's what we aim to do at Kiplinger's. For the last dozen years, our April or May cover story has featured our take on the nation's best stock and bond funds -- and assembled them into portfolios tailored to your goals, whether long-term, medium-term or short-term. (You can access our portfolio recommendations year-round on Kiplinger.com.)

If you followed our fund recommendations from last May's issue, you're sitting pretty. Our average stock fund returned 53%. That's 11 percentage points better than the S&P 500. But we're not standing still. Indeed, because of market gyrations and fund closings, we're making more changes than we previously ever have for the coming 12 months.

Most of our funds slaughtered the S&P 500. Royce Opportunity soared 101% compared with 70% for the small cap Russell 2000 index. Masters' Select International returned 68% and beat Morgan Stanley's EAFE index by 12 percentage points. Our worst pure stock fund, ABN AMRO Montag and Caldwell Growth, still returned 27%. Our recommended bond funds likewise shined, returning an average of 12% -- seven percentage points better than the Lehman Brothers Aggregate Bond index.

Our model portfolios performed just as we would have hoped in a bull market. The long-term portfolio returned 59%, while the medium-term portfolio rose 47%. The short-term portfolio, with 40% in bond funds, still earned a robust 31%.

Now for the changes

We're dumping Royce Opportunity because we think the tiny tech stocks that did so well for it are about out of steam. We're replacing Fidelity Small Cap Stock with Century Small Cap Select because we think the latter, with fewer assets, is a stronger choice. We're also ratcheting up our investments in blue chip stock funds and foreign stock funds -- because that's where the values are.

With rates hovering near historic lows, we're suggesting you put less of your money in long-term bond funds. For the first time in many years, we're not recommending any high yield "junk" bond funds or Real Estate Investment Trust (REIT) funds because those sectors have overheated. Third Avenue Real Estate Value invests mainly in real estate operating companies, not REITs. Finally, Merger Fund and T. Rowe Price Mid-Cap Growth, both fine funds, have closed to new investors.

We think the portfolios we've selected will do well in this market. We don't expect the kind of near perfection we achieved in the last 12 months anymore than we expect the market to have another 40%-plus year. But we do expect our portfolios to provide returns that are better than you could achieve with index funds while subjecting you to less market volatility.

The recommendations

For more information on investing timelines and what specific goals fit within each portfolio, see Kiplinger's Fund Portfolios.