Mutual funds make ideal vehicles to improve your investment portfolio because they usually contain a mix of stocks and bonds. A proper balance of your mutual fund portfolio provides you with moderate returns that steadily grow for long-term investing that avoids the uncertainty of frequent trading or trying to time the market. A financial planner or investment professional can help you select a variety of funds for a balanced portfolio.
Stocks and Bonds
Mixing stocks and bonds in a mutual fund combines risk and security. Stocks have high risk, especially in a volatile market, but they generate great returns. The price of one stock might soar in a short time, but it can also decline rapidly. Some investors may even benefit from the rise and fall of certain stocks when they provide an overall strong return over several years. Because investing in stocks can be chancy, you offset the risk with investments in bonds. They don’t generally offer as high a return as stocks, but bonds provide safer investing. You purchase a bond in return for a specified rate of interest.
The standard allocation for your funds is 60 percent stocks and 40 percent bonds. However, this can change as you age. You can afford risky stocks when you are younger, with time to rebound over the years. Putting more emphasis on bonds makes more sense as you approach retirement age. A good percentage rule to follow is allocating 100 minus your age in stocks, according to CNN Money. Some mutual funds also include cash equivalents, such as money market funds, certificates of deposit or Treasury bills. Investors generally focus on stocks and bonds for mutual funds. Cash equivalents offer safety, but usually for the short term. Inflation risks can have a negative effect on such investments.
Asset allocation alone doesn’t provide the balance you need for your fund portfolio. Spreading your money throughout different stocks, industries and market sectors helps to reduce your risk while growing most investments in your overall fund. You and your financial adviser can balance your portfolio with funds that include various companies across the board with sectors that include consumer goods, financial services, health care, industrial goods, services, technology or utilities. Some funds may specialize in certain industries and sectors. Your portfolio may contain several mutual funds with different specialties and mutual funds that focus on spreading investments throughout the different sectors or industries.
Review and Rebalance
Examine your portfolio regularly, either every quarter or semi-annually to maintain the strength of your mutual fund investments. You might need to rebalance your portfolio once in a while, perhaps as often as once a year. Investors often change their stock investments, but mutual funds usually have longer lasting goals because of allocation and diversification. Still, some mutual funds may underperform the market as others rise significantly, depending on the economy and how the volatile market affects industries and sectors. You can sell funds that are not performing as well as expected and buy funds that promise better performance. You may also sell shares of your best funds and use the profits to feed lower-performing funds that still hold some future promise for growth.
Jerry Shaw writes for Spice Marketing and LinkBlaze Marketing. His articles have appeared in Gannett and American Media Inc. publications. He is the author of "The Complete Guide to Trust and Estate Management" from Atlantic Publishing.