The American Funds group is one of the biggest mutual fund companies in the world. Although they are broker-sold funds, many do-it-yourself investors have American Funds in their employer-sponsored retirement plans, such as 401(k)s.
Mainstream brokers, such as Edward Jones, love to sell American Funds because they typically have solid long-term track records and they can earn their fees by selling mutual share classes that charge loads, such as A Share Class (front load) and B Share Class (back load).
To accommodate the demand for no-load funds, especially in 401(k) plans, American Funds created the R-share class, which enables brokers to get paid in other ways, such as 12b-1 fees. For example you may have seen American Funds Growth Fund of America or American Funds Fundamental Investors or American Funds Small Cap World in either R1, R2, R3, or R4 share classes.
But which are the best American Funds and how can an investor build a portfolio with them? You came to the right place for the answer!
Start With the Best Portfolio Structure
Before we choose the best American Funds to use for our portfolio, we'll review a simple but effective portfolio structure, called core and satellite, which is just as it sounds: The portfolio is built around a "core holding," such as a large-cap stock index mutual fund, which represents the largest portion of the portfolio, and other types of funds—the "satellite holdings"—each consisting of smaller portions of the portfolio to finish the whole. The satellites typically consist of funds from various categories, such as foreign stock, small-cap stock, bond funds, and sometimes sector funds.
The primary objective of this portfolio design is to reduce risk through diversification (putting your eggs in different baskets) while outperforming (obtaining higher returns than) a standard benchmark for performance, such as the S&P 500 Index.
American Funds does not offer index funds or sector funds but there are plenty of outstanding choices in their fund lineup to help you build a diversified portfolio. Also, many of their mutual funds have exposure to foreign stocks, even if they are not categorized formally as foreign stock funds.
Therefore, to prevent too much fund overlap and because you'll get appropriate exposure to foreign stocks from other funds in the portfolio, this sample portfolio of American Funds will not have a dedicated foreign stock fund.
Sample Portfolio of the Best American Funds
Now that we have a smart design for our portfolio of American Funds, we can look at an example that can serve as a model to build your own portfolio:
- 40% American Funds Growth Fund of America (AGTHX): Large-cap stocks
- 20% American Funds Smallcap World (SMCWX): US and foreign small-cap stocks
- 40% American Funds Bond Fund of American (ABNDX): bonds
This particular blend of American Funds is an example of a moderate portfolio, which is appropriate for an investor with a moderately high risk tolerance and a time horizon of at least five years. Moderate investors are willing to accept periods of moderate market volatility (ups and downs in account value) in exchange for the possibility of receiving returns that outpace inflation by a significant margin. The asset allocation breakdown is 60% stocks and 40% bonds.
Also keep in mind that all of the funds in this sample portfolio of American Funds are their A share funds. If you are investing in a 401(k) plan, it is likely that R shares are being used and therefore the ticker symbol will be different.
You may also notice that this portfolio only has three funds in it. These three funds are so broadly diversified that there is no need for more funds in the portfolio.
No matter which American Funds you choose, just be sure you are using a diverse mix of mutual fund categories and follow these guidelines on analyzing mutual funds.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.