The Only 7 Investments You Need

It's a tough market, but don't think that means you need more weapons for your portfolio. Now more than ever, don't complicate your strategy. Simplify it.

1. A Blue-Chip U.S.-Stock Fund

First choice: Fidelity Spartan 500 Index (FSMKX)

Not so long ago, the idea that U.S. stocks should be at the core of any investment strategy would have been deemed too obvious to discuss. This decade, in which the brutal 2000-02 bear market and the current downturn have left the S&P 500 stuck where it started, may have changed that.

Let's review: Since 1967 there have been seven bear markets, with losses ranging from 19% to 49%. Even so, the annual gain for blue-chip U.S. stocks is 10.8% - far outpacing bonds. Those painful but temporary losses are the price you pay for higher potential returns.

And those gains are the best defense against the corrosive effects of inflation. Are stocks better than gold at whipping inflation? Way better: Since 1908, stocks have grown more than eightfold after inflation; gold has little more than doubled in today's dollars.

Although U.S. firms no longer dominate the world, their stocks still account for more than 40% of the world's equity value. So U.S. blue chips need to be at the heart of a diversified strategy.

The best way to own them is through the Fidelity Spartan 500 Index fund. It replicates the performance of the S&P 500 and takes only a sliver of a fee for doing so: 0.10% a year.

Alternatives: iShares S&P 500 Index (IVV) and Selected American Shares (SLASX)

2. A Blue-Chip Foreign-Stock Fund

First choice: Vanguard Total International Stock Index (VGTSX)

The most important reason you need to own foreign stocks has nothing to do with the fact that they've trounced U.S. equities for the past five years. Sticking only with domestic stocks is akin to shopping in a store that's missing most of its inventory: Nearly 60% of the world's stock market value resides in companies outside our borders.

Besides, since investing in stocks is all about owning a piece of a growing economic pie, you have to go to where the growth is - and 76% of the world's economic activity takes place outside the U.S.

Then there's the diversification argument. Even though foreign markets held up no better than U.S. ones in the current downturn, overseas diversification still works. Researchers at T. Rowe Price found that since 1970, a 20% weighting in foreign equities both raised a U.S. fund portfolio's return and cut its risk.

The simplest way to add stocks from both developed and emerging economies to your portfolio is to own Vanguard Total International Stock Index. As an index fund, it merely aims to match the return of the world's stock markets. Thanks to the inherent wisdom and efficiency of this approach - the fund charges a tiny 0.27% a year in expenses - it has outperformed more than 90% of its peers over the past five years.

Alternatives: Vanguard FTSE All World Ex-U.S. ETF (VEU) and Dodge & Cox Intl. Stock (DODFX)

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