By now, you have a pretty good sense of how to find and identify good mutual funds. Next, you've got to assemble them into a meaningful whole. Intelligent asset allocation helps you build your perfect portfolio with a selection of funds tailored to your individual timeline and tolerance for risk.
Asset allocation doesn't get nearly the attention it deserves in the financial media. Alas, it's just not a sexy topic. The TV pundits can't opine on its near-term performance prospects, or castigate its management team for -- horrors! -- missing earnings estimates by a penny.
But when it comes to Foolishly building the perfect portfolio, asset allocation should be job one. If you're serious about investing regular amounts over a significant length of time, you owe it to your nest egg to assemble a well-chosen basket of securities culled from across the market's cap ranges (small, mid, large) and styles (growth, value). That way, when one area of the market cools off, your investments from other areas can take up the slack, cushioning your returns in the process.
Sure, it's possible to build a portfolio of individual stocks that provides the kind of asset allocation we're talking about here. But mutual funds make doing so a cinch.
With a little help from mutual funds, it's relatively light work to assemble a portfolio that provides meaningful exposure to the market's various styles and cap ranges. Want to plunk down 50% of your investment dollars in buttoned-down large caps, another 20% in value-priced mid caps, and divide the rest between small caps and cash? No problem. The only trick lies in finding the right funds.
One size fits ... one
While a financial advisor can point you in the right direction, only you can determine what constitutes your perfect portfolio. You may consider yourself an aggressive, moderate, or conservative investor, but you'll probably find that none of those roles fits you completely comfortably.
For one thing, your tolerance for risk will likely vary according to your age and retirement timeline. And even cautious types will likely want at least some exposure to growth stocks, even into the early years of retirement. Investing daredevils, meanwhile, should bear in mind the benefits of bonds as they get closer to AARP age.
We're firm believers in the Foolish notion of owning both index and actively managed funds with proven managers, sound strategies, and reasonable costs. When it comes to your money, it simply makes Foolish sense to be proactive, instead of being reactive, and to make the most of your fund investments, whether they're in an IRA, a 401(k), or just part of a bigger portfolio.
Remember, your funds' future performance is much more important than what they've done in the past. That's why it helps to focus on long-term top performers with market-beating potential for the long run.
The benefits
If you do your homework and choose mutual funds intelligently up front, your portfolio can allow you to build wealth over time without losing any sleep. After all, unlike individual stocks, well-chosen funds rarely (if ever) leave you with a nagging suspicion that you should have dumped your shares yesterday. Even better, you're always welcome to invest more when a fickle market puts your favorite funds on sale.
Despite what the stock jocks tell you, you can build the perfect portfolio with mutual funds. They're convenient, cost-effective, and a lot less risky than individual stocks. And for folks who have better things to do than check their stocks every five minutes, mutual funds provide a peace-of-mind alternative -- or just a reassuring backstop to a selection of individual stocks. For serious long-term investors, mutual funds may be just about the perfect investment vehicle.
Half the fun of fund investing is playing money manager with your own portfolio, tilting it toward growth or value -- and, even better, hiring and firing stock pickers as you see fit. Perfection isn't some distant point on the horizon. It's a process. And the perfect portfolio is pretty much bound to be a perpetual work in progress.
Now that you know the basics of asset allocation, let's start assembling a winning portfolio.
