One of the easiest ways to diversify your portfolio is to invest in a mutual fund. A mutual fund is like a basket in which lots of investors place their money and then that single large account is managed by a team of professionals. There are mutual funds that specialize in stocks, bonds, real estate, commodities… nearly any sector you wish to invest in has a mutual fund.
The two main advantages of a mutual fund over buying individual positions is that you can diversify your holdings (diversification is a traditional tactic to spread out risk), and you give the reins of portfolio management to a well-trained and experienced company.
Large variety of choices
There are thousands of different mutual funds to choose from, so how do you decide which one? First, identify your investment goals and level of risk tolerance. Are you investing for the short or long term? Do you need your money to grow, or are you looking for additional income, in which case you should consider a fund that pays high dividends? Different funds have different risk levels; make sure to choose one that is a good match.
Beware of having too much diversification
If you own more than a few mutual funds, the contents of the funds may overlap, adversely affecting your overall diversification. Periodically check your funds to make sure their contents haven’t drifted because sometimes a fund that claims to invest in one type of security ends up moving away from that sector and owning something else.
Feed your fund
After you choose which fund to buy, consider buying additional shares on a regular basis. Ideally, you should be saving between 10 – 15% of your monthly income. If that’s too difficult right now, begin with a smaller sum.
Mutual funds provide much needed diversification with professional oversight and for many people they serve as the foundation of their retirement plan. If you haven’t yet read The Retirement Planning Book, download your free copy here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published April 1, 2015.