If you’re a bit more experienced in investing or are fortunate enough to have a bit of money to ”play around with” for a while, a somewhat more aggressive approach might be right down your alley. Determining Asset Allocation. Once level of risk tolerance is determined, consider your desired asset allocation—the mix of investment assets (stocks, bonds, and cash) comprising your portfolio. The proper asset allocation will reflect your level of risk tolerance: aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).
Retirement is generally considered a long-term investment objective. But there are mutual fund types, such as money market funds or bond funds, that are suitable for most short-term needs. Investors may also combine types of funds to tailor more specific investment objectives. Mutual Funds Are Versatile Enough to be Used By All Types of Investors. All of the advantages of mutual funds mentioned in this article combine into one advantage of flexibility. They’re simple enough to be understood and used by beginners but versatile enough to be used by professional money managers, who often use them to build portfolios for clients.
Mutual Funds are Professionally Managed. Many investors don’t have the resources or the time to buy individual stocks. This is where professional management is valuable. Investing in individual securities, such as stocks, not only takes resources but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.
Balanced Funds: Also called hybrid funds or asset allocation funds, these are mutual funds that invest in a balanced asset allocation of stocks, bonds, and cash. The allocation usually remains fixed and invests according to a stated investment objective or style. For example, Fidelity Balanced Fund (FBALX) has an approximate asset allocation of 65% stocks and 35% bonds. It considered a medium risk or what industry experts might call a moderate portfolio. Vanguard also has an outstanding index balanced fund, Vanguard Balanced Index (VBINX), which is suitable for investors looking for moderate risk. Balanced funds can be ideal for beginning investors because they are well-diversified and can, therefore, be used as stand-alone investments or as core holdings to begin a larger portfolio.
Investing in Mutual Funds Is Easy. Putting together a portfolio of stocks and bonds can be difficult, if not impossible, for the average investor. For example, the time and knowledge required to research and analyze a dozen or more stocks can be too challenging for most people. That’s not to mention all the trades needed to build the portfolio, plus the ongoing research and analysis required to maintain the portfolio. But when it comes to investing in mutual funds, investors can get started investing with just one mutual fund.