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Money Matters – Mutual Funds: Building A Portfolio

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420x316-grad-lee Dee Lee
Dee Lee is a Certified Financial Planner who received a diploma in...
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BOSTON (CBS) – Let’s start the New Year with a look at your portfolio. And if you don’t have a portfolio it’s time to learn about investing in mutual funds.

[Audio http://cbsboston.files.wordpress.com/2011/01/january-3-2010-money-matters.mp3|titles=Building A Portfolio|artists=Dee Lee]

You want to build a portfolio based on your goals and time horizon so you can ride out the ups and downs of the market. How many funds you own is partly a function of how much money you have to invest.

I would recommend a six-pack of mutual funds that might include the following:

  • Large Cap Growth  (up about 15%)
  • Large Cap Value (13%)
  • Small Cap Blend (Value & Growth) (up over 25%)
  • Mid Cap Blend (Value & Growth) ( up over 21%)
  • International  (10%)
  • Bond/Money market/cash

You have to know the various fund minimums and you want enough money in each fund to make an impact on your portfolio’s overall performance.

As your money available for investing increases, limit your fund choices to a maximum of a 10-12 funds. With more funds than that you just end up being closer and closer to an indexed portfolio. You’d be better off just buying index funds in the beginning because the management fees will be lower.

Beware of overlap. Overlap is owning too many of the same style funds which invest in the same individual stocks.

Although it sure is easy to put all your money in one mutual fund family like Fidelity or Vanguard, I would suggest you look for the best mutual funds in each fund family. You can open up separate accounts with each fund family, but many have some type of fund “supermarket”. Fidelity and Schwab both allow you to own other fund families.

This will put all your holdings on one statement which makes life a whole lot easier when it comes tax time.

The final point is that your six-pack shouldn’t be divided equally among six funds. The key to making money is finding the right mix of this six-pack to fit your financial objectives and risk profile.

A model portfolio for a goal that is 10 years away might be 60% stock and 40% bond/cash. The stock portion might be; 50% large and mid-company stock, 30% small company stock and a 20% international exposure. The 40% bond portion could be in bonds, bond funds or even a money market.

With a goal of retiring in 5 years you should consider having a larger portion of the portfolio in bonds and cash so you could ride out several years of a bear market without having to sell the stock positions in your portfolio.

One more thing: Good books by Morningstar: Find The Right Mutual Fund, Diversify Your Mutual Fund Portfolio &  Maximize your Mutual Fund Returns

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