How To Build Your Mutual Fund Portfolio

A portfolio is simply an investment or group of investments designed to maximize returns while minimizing risk. A mutual fund portfolio is the same thing, an assortment of mutual funds designed to maximize returns based on your personal risk tolerance. To get started planning YOUR mutual fund portfolio:

1. First, evaluate your Risk Appetite
2. Next, decide Your asset allocation
3. Then, allocate your cash.

Risk Tolerance

Risk tolerance is your ability to handle (tolerate?) the inevitable declines in the value of your investments (no one needs “help” handling increases!). Risk tolerance is not actually a quantifiable figure but is instead a subjective evaluation that depends on both practical and personal factors:

1. Your available funds

Only invest money you don’t need to cover your everyday bills and expenses (or anticipated expenses, like upcoming medical bills, college expenses, etc). The less you “need” the money you’re investing, the higher your risk tolerance.

2. Your investment time horizon

Risk tends to decrease the longer you hold on to your investments. The shorter your time horizon—the amount of time you expect to hold your investments—the lower your risk tolerance.

3. Your personal aversion to risk

Do you have a tendency to avoid risk … or seek it out? The more you can stomach risk, the higher your risk tolerance will be in terms of investing and the higher the potential reward.

Over longer time periods, risk and reward typically go hand-in-hand: the greater the risk you can tolerate, the greater your possible rewards. Based on your available funds, time horizon, and risk aversion, you can decide how aggressive or conservative your ideal mutual fund portfolio should be.

• Aggressive - Accepting bigger risks for the long-term potential of bigger rewards
• Moderate - Limiting risk somewhat while also limiting potential reward somewhat
• Conservative - Limiting risk while also limiting potential reward

Asset allocation is the process of buying various types of stocks, bonds, mutual funds, ETFs, or other securities in order to create a diversified investment portfolio. The relative risk and reward of a mutual fund generally depends on security type it holds. Based on the different risks associated with different types of funds, you can allocate your assets across different funds to make sure that your investment is exposed to the right amount of risk (and potential reward) for your personal financial situation.