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Mutual Funds: Building A Portfolio

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(Photo by Chip Somodevilla/Getty Images)

(Photo by Chip Somodevilla/Getty Images)

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 most of you do have a portfolio if you invest in your retirement plan at work.

Mutual funds are what most of us invest in. We pay someone else, a fund manager, to mind the store for us in choosing investments and selling or buying.

You want to build a portfolio based on your goals and time horizon so you can ride out the ups and downs of the stock 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 in the beginning that might include the following:

  • Large Cap Growth
  • Large Cap Value
  • Small Cap Blend (Value & Growth)
  • Mid Cap Blend (Value & Growth)
  • International
  • 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 available money 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 mutual funds which invest in the same individual stocks.

If you are investing outside your retirement plan at work, consider going to some type of mutual fund super market that allows you to own the best mutual funds from different companies. 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. This is your asset allocation.

With a goal of retiring in 5 years you should consider having a very large 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.

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-size 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.

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

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