Organizing Mutual Funds for Selection

“How do I begin selecting mutual funds?” The answer to this question relies upon your investment goal. If you are investing for an event that is less than two years away, the answer will be completely different than if you are investing for something that is further in the future like retirement. When developing an investment portfolio for a goal far off in the future you will want to create a portfolio based upon your risk tolerance. To select the portfolio that fits your risk tolerance use our Guide to Selecting the Right Portfolio.

With your portfolio selected it is time to begin choosing mutual funds for your portfolio. Get a list of the mutual funds available in your plan. Start by sorting these mutual funds into different categories:

• Stock
• International Stock
• Bond
• Cash Equivalent (Money market, stable value)
• Specialty Funds
• One-stop Funds like Target Date and Lifestyle Funds
• Balanced or Asset Allocation Funds with a mix of stocks, bonds, and cash holdings that change their allocations depending on market conditions

Since we are building our own portfolio, we will only look at funds in the first three categories. We will try to create a well-diversified portfolio that matches the target balance that we selected previously. For example, if you picked a target balance of 60% stocks and 40% bonds (moderate risk level for a 10 year or greater time horizon) you will want to create a portfolio where 60% of your savings are in funds in the stock category and 40% in the bond category.

It is not enough, however, to simply pick one stock fund for the stock portion of your portfolio. One of the keys to successful long-term investing is to diversify your stock holdings. So, rather than picking one fund within the stock category, we will separate the stock funds into smaller categories and decide how much we want to invest in each of these smaller categories. This will ensure that we have a well planned diversification in our stock holdings, which will reduce the chance that our overall portfolio will contain more risk than is average for the overall market.

• Learn how to make sure you have the proper diversification in your stock funds.