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Asset Allocation Is Key To Building

Dissertações: Asset Allocation Is Key To Building. Pesquise 859.000+ trabalhos acadêmicos

Por:   •  12/9/2013  •  1.073 Palavras (5 Páginas)  •  557 Visualizações

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If you want to build a top-performing mutual-fund portfolio, you should start by hunting for top-performing funds, right? Wrong.

Too many investors gamely set out to find top-notch funds without first settling on an overall portfolio strategy. Result? These investors wind up with mishmash of funds that doesn't add up to a decent portfolio.

"A bunch of good funds isn't a portfolio," says Kurt Brouwer, co-author of "Mutual Fund Mastery" and an investment adviser in Tiburon, Calif. "If you just buy the best-performing funds at one particular time, you'll end up with a lot of funds that look quite similar. You end up with what's recently worked well. But the funds may not fit with your investment objective and they won't make any sense as a portfolio."

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Good Ingredients

Want to cook up a top-notch fund portfolio? Here are seven tips:

• Start by settling on your target mix of stock, bond and money-market funds.

• Before picking funds, decide what types of mutual funds you want to own.

• Don't add new funds unless you can invest at least $5,000.

• If you are in the 28% or higher income-tax bracket, consider tax-free bond and money funds.

• Those with large bond portfolios may want to include junk-bond, emerging-market debt and foreign-bond funds.

• Favor no-load funds with low annual expenses.

• Make sure the manager responsible for a fund's record is still at the fund's helm.

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So what should you do? With over 11,000 stock, bond and money-market funds to choose from, you couldn't possibly analyze all the funds available. Instead, to make sense of the bewildering array of funds available, you should start by deciding what basic mix of stock, bond and money-market funds you want to hold. This is what experts call your "asset allocation."

This asset allocation has a major influence on your portfolio's performance. The more you have in stocks, the higher your likely long-run return.

"That's what's going to really determine your investment results," says William John Mikus, a Los Angeles investment adviser. "Even the best money-market fund isn't going to outperform a mediocre stock fund over a long period of time."

But with the higher potential return from stocks comes sharper short-term swings in a portfolio's value. As a result, you may want to include a healthy dose of bond and money-market funds, especially if you are a conservative investor or you will need to tap your portfolio for cash in the near future.

Once you have settled on your asset-allocation mix, decide what sort of stock, bond and money-market funds you want to own.

This is particularly critical for the stock portion of your portfolio. One way to damp the price swings in your stock portfolio is to spread your money among large, small and foreign stocks.

You could diversify even further by making sure that, when investing in U.S. large and small-company stocks, you own both growth stocks with rapidly increasing sales or earnings and also beaten-down value stocks that are cheap compared to corporate assets or earnings.

Similarly, among foreign stocks, you could get additional diversification by investing in both developed foreign markets such as France, Germany and Japan and also emerging markets like Argentina, Brazil and Malaysia.

In fact, many investors aim to have one fund for each of these market segments, so that they own a large-company growth fund, a large-company value fund, a small-company growth fund, a small-company value fund, a foreign-stock fund and an emerging-markets fund.

But you could get the same exposure using a smaller number of funds. Indeed, many fund companies now offer so-called life-cycle funds, which give you a global stock portfolio and a smattering of bonds and cash investments in a single mutual fund.

"The more money you have, the more you can fine tune and the more you can diversify," says Robert Bingham,

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