Core Funds: Investing Essentials

Find out what you need to know about investing in core funds.

Aug 8, 2014 at 2:24PM

Money Tree

Source: jdacommunity.com.

Many people mistakenly assume that in order to invest successfully, you need have a wide variety of investments. While a diversified portfolio is indeed an important element of balancing return potential with risk management and safety, being diversified doesn't necessarily mean owning a huge number of different investments. To make it easier for investors to hold well-rounded portfolios, mutual fund companies have established core funds that can be used as the foundation of your investment strategy. Let's look at core funds and whether you should include them in your portfolio.

What are core funds?

Core funds are designed to constitute the essential elements of your overall investment portfolio. Different fund companies define core funds differently, but typically these funds include several types of investments that are suitable for most investors, making it easier to get the investment exposure they want without buying a huge number of individual stocks, funds, or other securities.

The primary purpose of core funds is to provide a stable base that doesn't require much, if any, adjustment over long periods of time. Although people might invest a small portion of their overall portfolios in noncore opportunities in an effort to boost overall returns, keeping their core funds intact ensures they can reliably stick to their investment strategy and simplifies the handling of additional investments.

What is the history of core funds?

The idea of having a primary fund-based holding in your portfolio has been around for decades, with many investors employing the strategy of having a broad-based mutual fund as a core holding while adding individual stocks to boost overall returns. The rise of index mutual funds dramatically increased the use of the core fund concept, as index funds tracking broad-based indexes such as the S&P 500 made excellent core funds for most investors seeking to match the return of the broader stock market.

Money Attributed

Nowadays, fund managers market a wider variety of their offerings for potential use as core funds. Morningstar points to large-cap blend and large-cap value funds as good core fund holdings, as they offer solid but unextraordinary returns with less volatility than more aggressive stock mutual funds. Similarly, on the fixed-income side, core funds often combine Treasury, corporate, and municipal bonds to provide balanced exposure to the bond market. As international investing has become more popular, global core funds have emerged that aim to balance their investments in developed and emerging-market nations around the world.

How many core funds are there?

Any mutual fund can be used as a core fund if it aligns with the goals of a particular investor. What many investors consider a specialty fund can be a core fund for someone who wants to focus entirely on that niche.

That said, a search of the Securities and Exchange Commission's mutual fund screener found hundreds of different funds that include the word "core" in their names. That shows the popularity of the core fund concept, but it also raises concerns about how well those many funds actually serve as core holdings for a wide range of investors. Marketing aside, you have to assess whether something that calls itself a core fund is truly appropriate for your investing needs.

The core fund concept has become popular not only among mutual funds, but also in the exchange-traded fund world. For instance, the iShares family of ETFs has established a core of 20 funds designed for investors to use to create a diversified portfolio. With ETFs covering U.S. and international stocks, as well as the U.S. bond market, iShares hopes to drive more retail investors toward its core fund offerings while retaining its popularity among institutional investors.

Why invest in core funds?

Money

Source: 401k 2013 via Flickr.

The biggest benefit of using core funds in your portfolio is to maintain investing discipline and ensure that you have a solid foundation to implement your specific financial strategy. Without a core fund philosophy, many investors find themselves owning large numbers of mutual funds that they initially chose based on short-term popularity and performance but that no longer serve a useful role in their overall portfolio. Moreover, even though mutual funds have varying names and often appear to be aimed at achieving different results, their holdings can be similar or even nearly identical, which makes owning multiple funds completely ineffective at generating the diversification that most investors would expect.

One of the best uses of a core fund is within a 401(k) or other employer-sponsored retirement plan. Because 401(k)s have a limited menu of available investment options, an all-purpose core fund is often the best choice to diversify your retirement savings.

Core funds can help simplify your overall investing immensely. Even if you use a portion of your assets to invest in noncore holdings in hopes of better returns, keeping most of your money in a select group of core funds can help you stay on course no matter what the markets throw your way.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers