Think about the role of the fund in your portfolio
Also consider how the investments you plan to own play together in your portfolio.
As we mentioned earlier, mutual funds are a great way to diversify your portfolio. But there is more than one way to break up. One is to hold a lot of stocks or bonds so that the individual performance of any one holding cannot position your portfolio. But in many cases you as well as They want to hold different funds from different asset classes.
“This helps your performance increase slightly over time, because certain asset classes perform better than others at different times due to market performance cycles,” says Ascend’s Jerke. “Depending on your age and time horizon, you’ll want a mix of large-, mid- and small-cap, global funds and possibly some bond funds.” Again, the younger you are and the longer your time horizon, the more aggressive you may be. This means you can lean more towards stock investments as opposed to something more conservative like bonds.
You can use mutual funds to fill every bucket that Jerk mentions; If you have a little money to start with, you can choose a few buckets to fill. But as you have more money to invest, you can add more buckets, and eventually diversify even further by getting into each fund’s investment objective. For example, some stock funds focus on value companies, while others focus on growth.
Don’t just trust the fund’s name, Jerke cautions. “Most of the time, you can tell by the name of the fund what the focus is and you can feel good about investing, but some funds aren’t that clear.”
A good practice is to look at the top holdings of each fund and make sure there is little overlap in your portfolio. Too much overlap can lead to too much concentration – the opposite of diversity.
“You can choose five different funds, but when you dig into the fund’s holdings, you’ll find that there are a large number of common holdings,” Jerk says. If this is the case, you may want to get rid of some of those funds and find other options.