It's good to have choices. But if you've got too many choices, it's easy to stress out about making the right one -- and to put off making any decisions at all.
Last year, a study looked at how people respond to having so many choices to make in their daily lives. The results showed that having too many choices made people less productive and more tired. In contrast, those who were given fewer choices and were told simply to act on the limited options available to them performed better.
As investors, we should take this lesson to heart. Although we face countless choices all the time in our investment decisions, narrowing down the field to a few good options can help us act more clearly and decisively. That often means the difference between success and failure.
More choices than you can shake a stick at
For beginners and experts alike, the investing world can be overwhelming. With thousands of stocks and mutual funds available, choosing just a few seems like an impossible task.
Trying to break things down into categories doesn't really help. You might think of stocks in terms of growth vs. value or large vs. small. But often, that just forces you to make more decisions, such as whether or not you should invest in a particular category, or how you should divide your money among the categories that interest you.
The answer is to put together a portfolio of core mutual funds. With just a few funds, you can get all the market exposure you need. As lead analyst Amanda Kish of The Motley Fool's Champion Funds newsletter has discussed at length, what funds you choose for your core portfolio can make a huge difference to your investment results.
A bit of everything
While the rise of exchange-traded funds has given investors plenty of ways to make extremely narrow bets on specialized corners of the market, core funds generally seek to find broad exposure across traditional investing boundaries. Some core funds combine stocks and bonds within a single fund. Others hold just stocks but bring together different categories, like growth and value stocks or large- and small-company stocks. As a result, instead of having to buy a bunch of specialized funds to cover all your bases, a small number of core funds can make up the bulk of your portfolio.
Well-structured core funds can reduce your volatility and give you plenty of diversification. Large-cap core funds often hold the best-known, most secure blue-chip stocks, like IBM
Once you have your core portfolio figured out, you can afford to take some risks on more specialized funds. But remember that these specialty funds can be more volatile than your core funds. For instance, the CGM Focus Fund gained 80% in 2007, largely because of the success of steelmakers U.S. Steel
The beauty of owning good core mutual funds, though, is that if you don't want to, you don't have to buy anything else. It's a low-maintenance strategy that simplifies your life while getting you the returns you need to achieve your financial goals.
If you're curious about the funds we're recommending right now -- or if you have other questions about mutual funds and how they work -- then help yourself to a 30-day guest pass to Champion Funds. You'll get access to our recommended fund portfolios, designed to cover all your bases with just a handful of different funds. Check it out -- there's no obligation and no risk.
In the meantime, don't let all the choices out there overwhelm you. Once you find some strong core funds, the rest of your portfolio will fall into place.
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This article was originally published on May 28, 2008. It has been updated by Dan Caplinger, who owns shares of Freeport-McMoRan. CGM Focus is a Champion Funds recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is always a good choice.