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Diversify Your Portfolio with Mutual Funds

May 22, 2008 – 3:23 pm

Mutual funds can be a terrific way to diversify your portfolio in this unpredictable market. However, there are more than 10,000 mutual funds in North America. This means that there are more mutual funds than stocks. It is very important to know and understand which types of mutual funds in which you are investing.

Each fund has a set investment objective that tailors the fund’s assets, regions of investment and investment strategy. The three main categories of funds are: equity funds, fixed-income funds, and money market funds. The risk characteristics are very different for each class. Obviously, equity is the most risky and money market funds are the least risky. Your personal risk tolerance and age should determine how much weight you want in each category.

Global/International funds have become extremely popular as investors seek more exposure to stronger growth economies. It’s tough to classify these funds as either riskier or safer than domestic investments. They are more volatile and have unique country and/or political risks. But, on the other hand, they can reduce your risk as they add more diversification to your portfolio. Although the world’s economies are becoming more inter-related, it is likely that another economy somewhere is outperforming our economy.

No matter what fund you own it is extremely important to evaluate the portfolio manager’s track record and how the fund has performed net of fees to its proper bench marks.

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