Building A Fund Portfolio

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Before investing in mutual funds, carefully consider your goals, how long you have to achieve them and your level of comfort with investment fluctuations. This will help you create the framework for a fund portfolio that meets your needs.

Risk And Reward

Generally, stocks are considered to be riskier than bonds because their value tends to fluctuate more. To compensate for the greater risk, investments in stocks have historically provided a greater return.

Every investment has some element of risk. The relatively low returns associated with a money market fund, for example, leave the investor exposed to purchasing power risk. This is the risk that the buying power of your assets will decline over time if your investment returns do not equal or exceed the rate of inflation.

Deciding the mix of stocks, bonds and cash that is right for you depends on a variety of factors.

• Readiness for emergencies. Before investing in longer-term assets, you should first set aside 3 to 6 months of basic living expenses in a cash account so you are ready for unexpected expenses such as a vehicle repair or a job layoff.
• Timing of your goal. The sooner you will need to use your money, the less you can generally afford to see it fluctuate in value.
• Your feelings about volatility. Each of us has a different level of comfort when it comes to seeing our investments rise and fall in value.
  

Pick The Right Mix

Dollar-Cost Averaging

This strategy focuses on investing a predetermined amount of money each month or pay period in order to take advantage of the daily fluctuations of the stock market. With dollar-cost averaging, you not only honor financial planning professionals’ advice to “pay yourself first” but also can help avoid the risk of trying to buy at “just the right time” or at “just the right price” with a lump sum of money.

Dollar-cost averaging does not guarantee a gain, nor can it prevent a loss when the markets are falling.

Researching And Selecting Individual Funds

Sources Of Fund Information

One especially important source is the mutual fund’s prospectus. This is a comprehensive document that mutual fund companies are required to provide you — either in print or electronically — when you invest in a fund.

Pay special attention to these sections of a mutual fund prospectus.

• Investment objective and strategies. This section describes the purpose of the fund and how it plans to achieve it.
• Risks. This is a listing and description of the various risks associated with the fund, given its objectives and the types of investments it selects.
• Risk/return chart. This bar chart shows the fund’s annual returns for each of the previous 10 calendar years (or, if the fund has existed less than 10 years, for the life of the fund). It provides insight into the fund’s historical volatility.
• Before- and after-tax return chart. Most funds are required to include a chart showing before- and after-tax fund returns for the past 1, 5 and 10 years, comparing them to an appropriate index. Money market funds are required to show only before-tax returns.
  Also, funds without annual returns for at least 1 calendar year cannot include any performance information. And funds with less than 5 or 10 years of performance would show returns since inception and omit the 5- and 10-year return numbers (as applicable).
• Fee table. This describes the fund’s fees and expenses and makes it easy to compare the costs of different funds. It also translates percentages into dollars by showing you the costs associated with an investment of $10,000 over the past 1, 3, 5 and 10 years.

Another excellent source of information is the fund’s latest annual or semi-annual report, which provides information on the fund’s performance along with commentary from the portfolio manager. These reports also provide a complete listing of the fund’s holdings as of the last day of the reporting period. Before investing, request the most recent report or view it on the fund company’s Web site.

In addition to the fund companies themselves, several research organizations, including Morningstar, Lipper Analytical Services, Value Line and CDA/Weisenberger, provide independent analysis of mutual funds. They offer some information without charge, yet some reports are available only by subscription. You may find their printed subscription materials at your local library.

Ticker Symbols

Mutual Fund Statistical Indicators