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You have set good goals, written an investment plan, selected benchmarks, and studied the various asset classes: you are now ready to begin picking specific assets for your portfolio. Picking financial assets is the next step in building a successful investment portfolio. Before you get started, you should recognize that this step cannot be completed in one day. In fact, it is likely that your portfolio will be most successful if you build it a little at a time by adding a small amount money to your investments each month.

This section provides a detailed framework for selecting mutual funds; however, this section only briefly discusses a framework for picking stocks. If you add individual stocks to your portfolio before it has become large enough to handle individual stocks, you are violating four of the principles of successful investing: stay diversified; invest low-cost; know what you are investing in; and don’t spend too much time, energy, and money trying to beat the market (unless you have a lot of time, energy, and money to spare). Individual stocks are not a required part of a successful portfolio; however, many people find picking individual stocks to be a lot of fun.

The Internet has facilitated a virtual explosion of information related to financial assets and investing. Many companies provide investing information on the Internet in hopes that investors who use the information will buy their products or use their services. Unfortunately, much of this information is biased, flawed, or even incorrect. So where can you find reliable mutual fund and stock information? There are a number of helpful resources that you should research before selecting your financial assets.

Before you can pick which funds you will invest in, you must understand the process of picking good mutual funds. The process for picking good mutual funds is outlined as follows:

  1. Determine the asset classes that are appropriate for your plan.
  2. Determine the appropriate benchmarks.
  3. Determine key parameters for each asset class (e.g., costs, fees, diversification, etc.) to identify potential funds.
  4. Use a database program to set your chosen parameters and evaluate each potential candidate.
  5. Evaluate each candidate and select the best funds.
  6. Purchase the funds (but not in December before distributions are made) and monitor performance carefully.

You determined the asset classes your portfolio should contain and the appropriate benchmarks for these asset classes in Investments 2: Your Investment Plan. Therefore, you have already completed steps one and two. This section discussed steps three and four; you learned how to determine key parameters for evaluating mutual funds of specific asset classes, and you learned how to use a database program to set those parameters and evaluate potential candidates.

There are a number of factors that you should consider when selecting mutual funds. These factors include diversification, costs, turnover, levels of un-invested cash, manager style drift, and amount of tracking error.

Now that you understand the parameters you should adhere to when selecting mutual funds, you can set your criteria and then use a database to get a list of all the funds that meet your criteria. For example, you can use Morningstar and Learning Tool 7: Using Morningstar to Select Funds to set your criteria for stocks, bonds, and other financial assets.

Index funds and exchange-traded funds (ETFs) are assets that hold the same proportions of specific shares as the proportions of shares held by a specific benchmark. The goal of index funds and ETFs is to match the benchmark performance of a specific asset class. There are nearly one thousand different index funds and over 500 different ETFs, and they all follow different indices related to geography, maturity, capitalization, and style.

Index funds and ETFs were created because some investors were concerned that actively managed funds were not always able to beat benchmarks after the effects of fees, taxes, and other expenses. By purchasing an index fund, investors stop trying to beat the benchmark: instead, investors accept the benchmark’s return and risk. Interestingly, index funds have tended to outperform most actively managed mutual funds over the long-term.

Managing your portfolio shouldn’t take a lot of time, but setting up your portfolio correctly will require effort. Regarding this idea, Elder M. Russell Ballard stated the following:

There are no shortcuts to financial security. There are no get-rich-quick schemes that work. Do not trust your money to others without a thorough evaluation of any proposed investment. Our people have lost far too much money by trusting their assets to others. In my judgment, we never will have balance in our lives unless our finances are securely under control. (“Keeping Life’s Demands in Balance,” Ensign, May 1987, 13)

The challenge is getting your finances (and your life) under control.


Now that you have completed this section, ask yourself the following questions:

  1. Do you understand why you should wait to purchase individual stocks until your assets have grown?
  2. Do you know how to find information on mutual funds and stocks?
  3. Can you describe how to pick a good mutual fund?
  4. Can you explain the value of purchasing an index fund or ETF?


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