Using mutual funds to diversify your portfolio

Getting the right investment mix

A diversified investment strategy is a key element for success. That's one of the things that make mutual funds so attractive. Each mutual fund pools the resources of many investors to purchase a diversified portfolio of holdings – many more than any individual investor could afford.

Mutual fund investors can add another layer of diversification by making sure their portfolio includes several funds with different objectives or management styles. Here are some strategies to keep in mind when contemplating your own diversified portfolio.ᶲ

Start with your objectives

You cannot build a solid portfolio if you don't prepare the foundation first. This means taking a frank and clear look at how long you are prepared to hold your funds, how realistic your performance expectations are, and how you'll react when your funds hit a bit of turbulence. Remember, the volatile nature of certain mutual funds requires patience and long-term commitment.

Choose quality over quantity

While diversity is generally a good thing, be careful not to over-diversify by spreading relatively small dollar amounts among too many funds. A mutual fund is already a diversified group of investments. Excessive diversification simply dilutes your portfolio's overall growth potential.

Regardless of how much money you have, few investors will ever need more than half a dozen different funds. If you're just getting started, you may want to consider investing in one good balanced fund until you've built up your savings.

Diversify by asset class

Different elements of the economy respond differently to changing economic conditions. For example, what's good for bonds may not be as good for equities. To ensure your portfolio is responsive no matter what the economy is doing, you may want to include as part of your holdings money market funds (cash-equivalent securities), bond or mortgage funds (income), and equity funds (stocks).

The proportion of each asset class you hold will vary depending on your objectives and market conditions. You'll want to review your allocations every year or two.

Diversify by geography

International diversification can shield your portfolio from undue volatility in any one region – including Canada. Besides, there are simply too many compelling investments around the world not to take advantage of them.

Your options range from funds that invest exclusively in the world's major economies to those that specialize in the growing and emerging markets.

Diversify by management style

Not all mutual funds are managed the same way. "Value" managers, for instance, look for bargain stocks that are trading for less than they are worth. "Growth" managers focus on the potential of a stock's price to go up and how fast it will do so.

Seek professional advice

The options are seemingly endless; seeking professional guidance can help you sift through them to find mutual funds that fit your objectives.

Connect with a BlueShore Financial investment advisor today to get your strategy on the right track.