A Simple Portfolio
Choosing investments doesn't have to be complicated. By estimating the amount you need to reach your investment goal, understanding your risk philosophy and choosing your desired allocation strategy, you've already done most of the hard work.
Now, you just need to select some investments to get you where you need to go. While some investors will choose individual stocks and bonds, others may gravitate toward funds.
Funds: A Simpler Choice
In the Determining Your Asset Mix section, we discussed how asset allocation can be diversified across three basic asset classes: stocks, bonds, and cash. We've also discussed whether your portfolio will have any small-company or foreign-stock assets. But when you need to fill in the specifics by choosing actual investments, you may want a simpler choice.
Investors seeking simplicity may go with mutual funds or exchange-traded funds (ETFs), preferring not to buy individual stocks and bonds.
Why? Funds generally require less monitoring than individual securities. Further, funds are usually well diversified--one fund can own hundreds of securities. As a result, they're less volatile than individual securities.
Additionally, simplicity-seekers may also want to invest only in terms of core holdings. As we explained in the Core vs Noncore Investments section, some investors choose to focus on a few core holdings and try to achieve diversification strictly through their core investments.
If you're considering using funds in your portfolio, here are a few things you may want to think about:
- You may be able to achieve two objectives with one fund if you're able to find a fund that invests in the entire U.S. stock market.
- For foreign stocks, a fund that provides market exposure in a single shot can make a solid core choice.
- Lastly, it's important to remember that, even though funds may offer a simpler way to achieve a diversified portfolio, fees can vary greatly. Fees charged by funds can act as a drag on total returns. It's also important to remember that allocation decisions are made by fund managers without input from investors.
Read Next: How Many Investments Should You Have?
Keep in mind that while diversification may help spread risk it does not assure a profit or protect against loss in a down market.
Bonds involve risk including, but not limited to interest rate risk, reinvestment risk, inflation risk, call risk, liquidity risk, credit risk, market risk, default risk, event risk, and a risk of loss of principal. New issue offerings are sold by prospectus or offering circular available at www.socttrade.com. Investors should read these carefully.
Please consult a tax, legal, or financial advisor with questions regarding your investment objectives and personal tax of financial situation.