Building a Portfolio

Selecting Funds for Your Portfolio

When it’s time to make decisions about the type of funds you will invest in, you will want to consider some of the factors already discussed: your time horizon, your rate of return, and your specific goal. There are mutual funds designed for almost any situation. The chart below can be used to identify the types of funds best suited to your particular investment objectives. Refer to it as you begin to formulate your portfolio, keeping in mind you'll probably want to have a mix of these investments.


Mutual Funds Fund Types and Your Objectives

If Your Objective Is You Want The Following Fund Type These Funds Invest Primarily In Potential Capital Appreciation Potential Current Income Potential Risk
Maximum Growth
  • Growth
  • International
Common stocks with potential for rapid growth. May employ certain aggressive strategies. High Very Low High to Very High
High Growth
  • Growth
  • Specialty
  • Sector
  • International
Common stocks with long-term growth potential. High Very Low High
  • International
  • Value
Common stocks with potential for dividends and capital appreciation. Moderate Moderate Moderate to High
Current Income
  • Equity Income
  • Bond
Dividend-paying bonds. Very Low High Low to Moderate
Current Income & Protection of Principal
  • Taxable Money Market
Money market instruments. None Moderate to High Low
Tax-Free Income & Protection of Principal
  • Tax-Free Money Market
Short-term municipal bonds. None Moderate to High Low

Principles of Building a Portfolio

Building a portfolio to fit your investment goals can be achieved with a variety of products or funds such as those in the chart above. It is important to begin by establishing a plan and determining whether your goal is to build wealth over time, generate income or other objectives.You may consider having different portfolios for different goals that incorporate your time horizon, risk, etc.

Basic Strategies

Setting yourself up for investment success involves developing a realistic and informed perspective on how to put your financial resources to their best use. Start with the end in mind by identifying your investment goals, your time frame and your tolerance for risk (discussed in Performance and Risk ). The time frame refers to when you make an initial investment and when you plan to access the money. Create a preliminary plan by selecting the types of accounts and products that will help map your goals to a fund’s goals. Investing should be about making decisions that are right for your situation, but keep in mind that diversifying your funds across asset classes and sectors helps spread the risk. Monitor your progress on a regular basis, review your investment allocation mix and make adjustments accordingly.

Achieving Goals

Investing in a well-designed portfolio has the potential to meet your short-term or long-term objectives. Short-term goals may range from minor home improvement projects to saving for a car; long-term goals may include saving for retirement or for your kids’ college education. Modern portfolios include approaches and funds intentionally chosen and allocated with your goals in mind. Revisit your portfolio often as goals may change based on life events such as buying a house, starting a family or beginning a new job.

Using an Advisor or Going at it on Your Own

Once you have familiarized yourself with the power of investing and why to invest, you have options on how to go about building and managing your portfolio. One way is by investing independently. This means that as an individual you will want to stay up-to-date on the industry and have timely awareness of emerging opportunities by using tools, resources and reading a variety of financial publications and investment newsletters. You are not relying on another individual to provide recommendations or consult with you, but you also do not have to compensate an investment professional for their services.

The other option is to use an investment professional or advisor. It is the job of an investment professional to work on your behalf, stay abreast of industry changes and inform you of investment opportunities. There are many types of financial advisors available to help, but financial planners holding a CFP certification have met education, examination, experience and ethics requirements. Investing requires a certain amount of vigilance and monitoring of your portfolio activity, which can be managed by an investment professional should you choose to go that route. Investment professionals require compensation for their work and they can be compensated in one of two ways. The first way is through fees, which are based on assets under management and/or a flat hourly rate for the investment professional’s advice. The second way is from commissions, which are based on your investment transactions.

Below are general questions to ask an advisor when considering how different investments fit within a portfolio:

  • Am I taking advantage of the right financial products?
  • Will my investments provide me with income?
  • How does my risk tolerance relate to the investment choices?
  • What tax-saving strategies should I know about?
  • Is anything missing from my financial strategy?