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Last year, investing was like being the proverbial duck in the pond. On the surface, everything may have seemed calm, as a post-election rally on Wall Street pushed stock indexes to record highs. But beneath it all was plenty of rough paddling. The S&P 500 index of blue-chip stocks, which gained nearly 10% in 2016, shed more than 9% at the start of the year. And small-company shares, which soared 17% over the year, nearly fell into a bear market early in 2016.

Markets like this are a great reminder that getting wrapped up in short-term twists and turns can be dangerous to your wealth. Sticking to a well-crafted strategy built to serve goals that are years and decades away remains a winning approach over the long run.

This has always been the focus for the Money 50, our handpicked list of the best mutual and exchange-traded funds (ETFs) you can use to construct an affordable and fully diversified portfolio. Our recommended funds have proved their mettle over the long term. The tradeoff: In exchange for consistency and reliability, these funds rarely top the charts in any given year.

To find our Money 50 stars, we focus on low-cost funds and long-term returns that match or beat their benchmarks. Given these criteria, index funds and ETFs make up the core of our list—indexing is typically the cheapest way to invest, and data show that few actively managed funds consistently outpace the market.

For those who prefer a human manager at the helm, and for less efficient markets, where smart investors may have an edge, we include actively managed funds. But we insist on veteran managers who look out for their shareholders and have a proven record of delivering strong long-term returns.

Take Sudhir Nanda, lead manager of T. Rowe Price QM U.S. Small-Cap Growth, which is making its debut on our list this year (see Top Stock Picks From 4 Professional Investors Who Keep Beating the Market). "We are looking to do well over three, five, and 10 years rather than try to hit a home run and end up striking out," says Nanda.

As for how our list is actually organized, the funds are grouped into three sections. The first part consists of "building block" options—14 low-cost index funds or ETFs designed to serve as the foundation for your portfolio. These funds give you exposure to the broad market and should make up the bulk, or possibly all, of your portfolio.

By contrast, "custom funds" are meant to play a supporting role in your portfolio by allowing you to slightly tilt your strategy toward a particular style (like bargain-hunting value investing) or a type of asset (such as dividend-paying stocks) that you deem attractive. This section is divided between actively managed funds and passively managed funds that offer you an investing tilt through a form of indexing.

Rounding out the list are "one decision" funds—offering full diversification through a single fund such as balanced or target-date retirement portfolios.

What's Out

Given our focus on consistent stalwarts, it's typical for more than 90% of the Money 50 to stay the same each year. That's again the case for 2017—we are making just three changes to the list. This year we are removing midcap-focused Ariel Appreciation (CAAPX) and small-cap funds Royce Opportunity (RYPNX) and Wasatch Small Cap Growth (WAAEX).

All three are actively managed portfolios run by solid teams of stock pickers and have performed decently over the long run, outpacing their peers over the past decade. But more recently, each has trailed more than half its peers over the past three years. Underperformance, though, isn't the primary reason for removing these funds. Costs are.

All three portfolios charge management fees that run from 1.12% of assets per year to 1.22%, making them among the most expensive portfolios in the Money 50. If you own them in a tax-sheltered account, you should consider switching. The funds that are replacing them are significantly cheaper, with an average fee of just 0.43% a year.

Low costs have always been a centerpiece of our decision-making, but never more so than now. Over the next decade, keeping your fees low will be critical, as U.S. stocks and bonds will be hard-pressed to return anywhere near their long-term averages (see 4 Big Investing Trends You Can Bet On for the Next Several Years). Fortunately, the boom in cheap ETFs gives cost-conscious investors more options than ever before.

What's In

  • PowerShares FTSE RAFI U.S. 1500 Small-Mid (PRFZ). This ETF is the small-cap cousin to PowerShares FTSE RAFI U.S. 1000 (PRF), which is in the Money 50. Unlike traditional index funds, which weight stocks in their portfolios based on size, PRFZ uses fundamental factors such as a company's cash flow, sales, and dividends. This gives the fund a value tilt. Like the fund it replaces, Royce Opportunity, PowerShares FTSE RAFI U.S. 1500 Small-Mid's emphasis is on super-small companies. It recently held nearly 40% of its assets in microcaps—typically companies with a market value of less than $500 million. Yet PRFZ's 0.39% fee is a third of what Royce Opportunity charges. Over the past 10 years, PRFZ has returned 8.8% annually vs. 7% for Royce Opportunity.
  • Vanguard Mid-Cap Value Index (VOE). The Money 50 already has a midcap index fund, iShares Core S&P Mid-Cap (IJH), which provides broad exposure to midsize stocks. By contrast, VOE tracks a midcap index with a decided value tilt. The average holding in this ETF sports a price/earnings ratio of 17.4, vs. 20.6 for iShares Core Mid-Cap. Its 7.7% annualized 10-year return is on par with the record of the fund it replaces, Ariel Appreciation. But its 0.08% fee is one percentage point cheaper.
  • T. Rowe Price QM U.S. Small-Cap Growth (PRDSX). The QM in the name stands for quantitative management—"quant" funds rely on computer models. Based on the sector weightings of the MSCI Small Cap Growth Index, Nanda and his team choose stocks that rank high on factors such as profitability and valuation. The team is extremely patient, often holding stocks for more than five years. And their goal is to get shareholders to do the same. "We want to outperform in down markets," says Nanda. "Preventing large drawdowns means compounding higher returns over the long term." Since Nanda took over 10 years ago, the fund's losses in bad markets have been 10% less than the average for small-cap growth funds. And the fund's 10.1% annualized gain ranks in the top 2% of its peers.

Building-Block Funds

These funds and ETFs, which offer you exposure to big chunks of both the U.S. and foreign stock and bond markets, should be used for the core part of your portfolio that you'll hold for years. Because you're seeking broad market exposure, low-cost diversified index funds are your best bet.

Fund name (ticker) Style Annual expenses (% of assets) 2016 total return % 5-year total return % Min. initial investment
Schwab S&P 500 Index (SWPPX) Blend 0.09 9.7 14.3 $100
Schwab Total Stock Market Index (SWTSX) Blend 0.09 10.5 14.3 $100
iShares Core S&P Mid-Cap ETF (IJH) Blend 0.07 18.1 14.7 N.A.
iShares Core S&P Small-Cap ETF (IJR) Blend 0.07 22.4 16.1 N.A.
Fidelity International Index (FSIIX) Large Blend 0.19 –1.6 5.5 $2,500
Vanguard Total International Stock (VGTSX) Large Blend 0.19 2.6 4.5 $3,000
Vanguard FTSE All-World ex-U.S. Small-Cap (VFSVX) Small/Mid Blend 0.31 2.8 5.6 $3,000
Vanguard Emerging Markets Stock (VEIEX) Emerging Markets 0.33 11.7 0.6 $3,000
Vanguard REIT Index (VGSIX) Real Estate 0.26 3.5 11.6 $3,000
Vanguard Total Bond Market Index (VBMFX) Intermediate Term 0.16 2.3 2.2 $3,000
Vanguard Short-Term Bond Index (VBISX) Short Term 0.16 1.4 1.1 $3,000
Vanguard Inflation-Protected Securities (VIPSX) Inflation-Protected 0.2 4.7 0.8 $3,000
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) Inflation-Protected 0.08 2.4 N.A. N.A.
Vanguard Total International Bond Index (VTIBX) World 0.17 4.2 N.A. $3,000

One-Decision Funds
Don't want to put together a portfolio on your own? Then use one of these professionally managed funds that hold a diversified mix of stocks and bonds.

Fund name (ticker) Style Annual expenses (% of assets) 2016 total return % 5-year total return % Min. initial investment
Fidelity Balanced (FBALX) Balanced 0.56 5.7 9.9 $2,500
Fidelity Global Balanced (FGBLX) Balanced 1.02 0.5 5.1 $2,500
Vanguard Wellington (VWELX) Balanced 0.26 8.7 10.4 $3,000
T. Rowe Price Retirement Funds Example: 2020 Fund (TRRBX) 62% stocks/38% bonds Target Date 0.66 6.2 8.7 $2,500
Vanguard Target Retirement Example: 2035 Fund (VTTHX) 82% stocks/18% bonds Target Date 0.15 6.5 9.8 $1,000

Custom Funds
Supplement your core holdings with these funds to tilt your portfolio toward certain kinds of stocks and bonds, diversify more broadly, or play a hunch.

Fund name (ticker) Style Annual expenses (% of assets) 2016 total return % 5-year total return % Min. initial investment
Dodge & Cox Stock (DODGX) Value 0.52 19.8 17.0 $2,500
PowerShares FTSE RAFI U.S. 1000 ETF (PRF) Value 0.39 14.8 14.9 N.A.
Sound Shore (SSHFX) Value 0.93 13.1 15.3 $10,000
PowerShares S&P 500 High Quality Portfolio (SPHQ) Blend 0.29 12.1 15.1 N.A.
Primecap Odyssey Growth (POGRX) Growth 0.64 7.9 16.3 $2,000
T. Rowe Price Blue Chip Growth (TRBCX) Growth 0.71 1.0 15.3 $2,500
Vanguard Mid-Cap Value (VOE) Value 0.08 14.1 15.6 N.A.
WisdomTree MidCap Dividend (DON) Value 0.38 18.5 16.1 N.A.
T. Rowe Price Diversified Mid-Cap Growth (PRDMX) Growth 0.87 7.5 13.5 $2,500
Vanguard Small-Cap Value ETF (VBR) Value 0.08 21.4 15.9 N.A.
WisdomTree SmallCap Dividend (DES) Value 0.38 26.5 16.2 N.A.
PowerShares FTSE RAFI U.S. 1500 Small-Mid (PRFZ) Blend 0.39 20.9 15.0 N.A.
T. Rowe Price QM U.S. Small-Cap Growth (PRDSX) Growth 0.82 10.9 14.7 $2,500
PowerShares International Dividend Achievers ETF (PID) Dividend 0.58 7.9 2.8 N.A.
SPDR S&P Dividend ETF (SDY) Dividend 0.35 17.9 14.3 N.A.
Cohen & Steers Realty (CSRSX) Real Estate 0.96 1.5 11.5 $10,000
SPDR Dow Jones International Real Estate ETF (RWX) Real Estate 0.59 –2.0 6.9 N.A.
iShares North American Natural Resources ETF (IGE) Natural Resources 0.48 29.2 –0.3 N.A.
Oakmark International (OAKIX) Large Blend 0.95 4.4 9.4 $1,000
Vanguard International Growth (VWIGX) Large Growth 0.47 1.4 6.4 $3,000
T. Rowe Price Emerging Markets Stock (PRMSX) Emerging Markets 1.24 11.3 1.8 $2,500
Dodge & Cox Income (DODIX) Intermediate Term 0.43 5.0 4.0 $2,500
Fidelity Total Bond (FTBFX) Intermediate Term 0.45 5.3 3.4 $2,500
Vanguard Short-Term Investment Grade (VFSTX) Short Term 0.2 2.7 2.3 $3,000
iShares iBoxx $ Investment Grade Corp. Bond (LQD) Corporate 0.15 5.3 4.8 N.A.
Loomis Sayles Bond (LSBRX) Multisector 0.89 7.4 5.0 $2,500
Fidelity High Income (SPHIX) High Yield 0.73 13.3 6.5 $2,500
Vanguard Intermediate-Term Tax-Exempt (VWITX) Muni Natl. Intermediate 0.2 –0.9 3.0 $3,000
Vanguard Limited-Term Tax-Exempt (VMLTX) Muni Natl. Short 0.2 –0.5 1.1 $3,000
Templeton Global Bond (TPINX) World 0.89 2.9 3.5 $1,000
Fidelity New Markets Income (FNMIX) Emerging Markets 0.86 12.1 6.0 $2,500

NOTES: Net prospectus expense ratios were used for annual expenses. 2016 total return figures are as of Nov. 30. Five-year returns are annualized. VWELX and OAKIX shares available only through fund company. TPINX has a 4.25% sales load. N.A.: Not available or not applicable. ETFs do not have a minimum initial investment.

SOURCES: Lipper and fund companies