Vail Valley: The right mutual funds can diversify your portfolio | VailDaily.com

Vail Valley: The right mutual funds can diversify your portfolio

Charlie Wick and Tina DeWitt
Vail, CO, Colorado

If you’re somewhat familiar with investing, you probably have heard that owning mutual funds is a good way to help diversify your portfolio. Is this true? If so, how should you go about selecting the right mutual funds?

To begin, let’s quickly review the importance of diversification. By owning a variety of investments – such as stocks, bonds and government securities – you can help reduce the effects of volatility on your portfolio. And while diversification by itself cannot guarantee a profit or protect against loss, a diversified portfolio can help you reduce the impact of market downturns that may hit one asset class particularly hard.

Because an individual mutual fund invests in many different securities, it automatically brings a certain degree of diversification to your portfolio. And yet you can’t just purchase any combination of mutual funds and expect good results.

Consider this: There are more than 8,000 mutual funds in the financial marketplace, according to the Investment Company Institute, the trade group for the mutual fund industry. About 60 percent of these funds are stock funds, with the rest being “hybrid” or “balanced” funds (which invest in a mix of stocks and bonds), taxable bond funds, municipal bond funds and money market funds.

With such a large number of funds available, and with a finite amount of stocks, bonds and other securities in which these funds can invest, it’s easy to see that there can be considerable duplication among many of these mutual funds – and duplication is the opposite of diversification.

Consequently, when you invest in mutual funds, you can’t just adopt a philosophy of “the more, the merrier.”

Furthermore, it isn’t just a matter of one “large-cap growth fund” looking like another. You might find that the large-cap fund (a mutual fund that invests in stocks of large companies) is also quite similar to a technology fund.

So what’s the solution to avoiding overlapping funds? There’s no magic formula – you have to do your homework. Before purchasing a mutual fund, look closely at its holdings, which will be posted on the fund’s prospectus. (Also, while you’re looking at the prospectus, make sure you understand the fund’s investment objectives, risks, charges and expenses.) Then compare these holdings to the ones listed on your existing mutual funds. If you see too many redundancies, you may want to take a pass on this particular fund.

Ultimately, your first step in diversifying a mutual fund portfolio is to identify your individual risk tolerance and investment objectives. Are you a conservative, a moderate or an aggressive investor? Do you need growth, income or a combination of both? Once you’ve answered these questions, you can then begin selecting the right mix of mutual funds to help you achieve your financial goals.

Of course, with all the variables involved, both in your personal situation and in the funds themselves, you may want to enlist the help of a professional financial adviser – someone with the experience to help you choose the funds that are right for you.

Many people have incorporated mutual funds into their investment strategy, and with the proper effort and assistance, you can too.

Mutual funds are offered and sold by prospectus. You should consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information. Your Edward Jones financial adviser can provide a prospectus, which should be read carefully before investing.

Charlie Wick and Tina DeWitt are financial advisers with Edward Jones Investments. They can be reached in Eagle at 970-328-4959 or in Edwards at 970-926-1728.


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