For instance, they dedicate a total of 14% of the portfolio to three funds that focus on large U.S. value stocks: Davis New York Venture, T. Rowe Price Equity Income and Vanguard Value Index. "The three of them complement each other for returns and for volatility," says George. In some market conditions, one might perform better than the others.
The advisors, however, note that individuals who are building their own portfolios may find it tough to research a large number of funds and figure out the differences. "You're better off buying a few funds that you know what they're doing and they're diversified," says Mr. Pudner, the research director. Also, for individuals, it can turn out to be very costly and unwieldy to keep track of a large number of funds.
The team at Mason uses mostly actively managed funds. "Up until last year, we found good active managers do very well in a down market," says George. "Last time around, all bets were off." The advisors use some index funds and ETFs also, to get additional exposure to some asset classes.
For large growth exposure in the U.S., the advisors invest 4% each in American Funds Growth Fund of America and Jensen Portfolio. The 8% allocation to small-company stocks goes to two value funds, Vanguard Small-Cap Value ETF and Berwyn Fund, and two funds that are more growth-oriented, Dreyfus/Boston Co. Small Cap Tax-Sensitive Equity and Conestoga Small Cap.
FOREIGN STOCKS: The portfolio's 15% foreign allocation is mostly in funds that buy stocks of large companies in developed countries. These include Dodge & Cox International Stock and Vanguard International Value, at 4% each, 3% in American Funds EuroPacific Growth and 2% in William Blair International Growth. Another 2% of the portfolio is in the SPDR S&P International Small Cap ETF, which buys small foreign stocks.
The advisors don't use a dedicated emerging-markets fund because they find them to be too volatile for their clients' appetite.
BONDS: The 35% portion of the portfolio allocated to bonds and cash is primarily in U.S. bonds of varying maturities. Seven percent is in funds that currently own bonds that mature in less than five years -- Vanguard Short-Term Investment-Grade and FPA New Income. For intermediate-maturity bonds, the advisors use Harbor Bond and Dodge & Cox Income, at 4% each, and for long-term bonds they invest 4% in Loomis Sayles Investment Grade Bond and 3% in Vanguard Long-Term Investment-Grade.
Earlier this year, the advisors started investing 6% in the Vanguard Inflation-Protected Securities bond fund. There is also a 5% allocation to foreign bonds, through Pimco Foreign Bond (U.S. Dollar-Hedged) and T. Rowe Price International Bond.
ALTERNATIVES: Of the remaining 20% of the portfolio, 11% is in funds that own real-estate securities -- Cohen & Steers Realty Shares and ING Global Real Estate.
The advisors kept buying those funds in the fall of 2008, even when they were losing value, in order to maintain their target allocations. "We have stuck to our guns," says Mr. Schreiner, the chief operating officer. The advisors believe that over the long run, real-estate investments help diversify a portfolio and reduce its volatility.