Aggressive Mutual Fund Portfolio
The aggressive mutual fund portfolio is best suited for investors with a higher risk tolerance and a longer time horizon. The time horizon is the duration in which you want to recover your money. Generally, this period is longer than 10 years for those with this mindset.
Aggressive investors are willing to accept significant market fluctuations. Market fluctuations refer to the price movements up and down that you see during trading periods. This philosophy allows for volatility while hoping for higher returns that significantly outpace inflation.
If there is a sharp market decline, you will need plenty of time to recover the loss in value. In general, the more stocks you have, the longer your investment period should be.
Note
If you belong to this category, you will need more than 10 years of investment to achieve a higher allocation of stocks and riskier investments. This period gives your assets time to recover from price declines.
Here is an example of a portfolio with 85% stocks and 15% bonds for an aggressive mutual fund investor:
– Allocate 30% to a large-cap equity fund (like an index fund).
– Allocate 15% to a mid-cap equity fund.
– 15% should go to a small-cap equity fund.
– Allocate 25% to a foreign or emerging markets equity fund.
– Invest the last 15% in a medium-term bond fund.
Aggressive portfolios work best if you are in your twenties, thirties, or forties. This is because you have several decades to invest and recover any losses from market fluctuations.
An aggressive mix might average a return of between 7% to 10% over time. In its best year, it could yield gains between 30% to 40%. In its worst year, it might decline by 20% to 30%. To build your portfolio, you should select mutual funds that fit this mix or adjust as needed.
Moderate Mutual Fund Portfolio
A moderate mutual fund portfolio is best if you have a medium risk tolerance and a time horizon of more than five years. In this case, you are willing to accept some market fluctuations for returns that surpass inflation.
Here is an example of a moderate mutual fund portfolio that includes 65% stocks and 30% bonds and 5% cash or money market funds:
– Allocate 40% to a large-cap equity fund (like an index fund).
– Allocate 10% to a small-cap equity fund.
– 15% should go to a foreign equity fund.
– Allocate 30% to a medium-term bond fund.
– Invest the last 5% in cash or money market funds.
This moderate portfolio may achieve an average annual return between 7% to 8%. The highest annual gain might range from 20% to 30%, while the largest annual decline might be between 20% to 25%.
Example of a Conservative Mutual Fund Portfolio
A conservative mutual fund portfolio is best if you have a low risk tolerance. You will also need a time horizon that spans more than three years. Conservative investors are not willing to accept periods of extreme market volatility and seek returns that match or slightly exceed inflation.
Here is an example of a conservative mutual fund portfolio with 25% stocks, 45% bonds, and 30% cash and money market funds:
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Put 15% in a large-cap stock fund (like an index fund).
– Put 5% in a small-cap stock fund.
– 5% should go to a foreign stock fund.
– Put 45% in a medium-term bond fund.
– Invest the last 30% in a money market fund or money market funds.
The highest gain this portfolio could achieve in a year could be 15%. In a bad year, it may drop from 5% to 10%.
Help from a Financial Advisor
Remember that all investors are different. Even if you belong to one of these three broad categories, your situation may differ from others. Working with a financial advisor is one of the best ways to enter the markets for new investors. Returns and market volatility may vary based on how you constructed your portfolio.
Frequently Asked Questions (FAQs)
What are the benefits and drawbacks of investing in mutual funds?
Mutual funds can help build a good balance in your portfolio, but they are not the only way. You can achieve the same exposure with many other investment products. Some benefits of investing in mutual funds are that they are professionally managed and diversified. This makes investing easy and provides some protection against volatility. However, investors who prefer to minimize management fees or have closer control over their investments may see this as a drawback. Mutual funds also do not trade like stocks or exchange-traded funds, meaning you cannot trade shares of a mutual fund throughout the day as you wish.
What are the costs associated with investing in mutual funds?
If the mutual fund you are investing in is a no-fee fund, the only cost of investing can be found by looking at the expense ratio. This is the percentage of the fund that the company retains as payment for managing the fund. Generally, actively managed funds have higher expense ratios than passively managed index funds, typically ranging from 0.015% to 1% or more. Some mutual funds may also charge sales fees applied when buying or selling shares (depending on their structure). Remember that your broker may also charge you fees associated with buying or selling shares of the mutual fund.
Source: https://www.thebalancemoney.com/mutual-fund-portfolio-examples-2466523
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