Using mutual funds to diversify your portfolio is perhaps the easiest way to invest. You can pick the fund’s that fit your desired risk and preferences and instantly be able to be invested in hundreds of stocks within that mutual fund family. The problem a lot of people run into, is they do not stop to think about the proper mix of their portfolio. Asset allocation is the process where the proper mix is determined. You need the type of mix that will continue to grow even when the stock market is not growing.

A companies size is determined by their market capitalization. Market capitalization is merely the multiplication of the number of outstanding shares by the current stock price. There are three different categories that companies are grouped into. These are Large Cap, Mid Cap and Small Cap. This grouping is done by the company’s market capitalization.

The website, Morningstar.com, is a good place to go to determine the type of the stocks or mutual funds you are looking at. At the top of the page, across from the welcome words, is a search field. Type your fund name here. Morningstar will display information about that fund you have input.

Part of the way down the page, you will find a box that has 9 different boxes within a larger box. This is called the style map. It details the type of fund this is. For example, it may be large, mid or small and also may be a growth, value or a blended fund.

Many times investors think they need to own a mutual fund for each one of the nine boxes that Morningstar classifies stock as. This is not correct. This will create a counter productive mix of your funds. What you want is a simplified mix of large, mid, small cap funds divided between growth and value funds.

Growth fund investors are looking for fast growing companies and value investors are looking for a bargain. Growth fund managers are looking for the companies that are growing faster than the average and value fund managers are looking for stocks that are undervalued.

A proper mix to begin with is to have one large cap value fund and one large cap growth fund. Next pick two funds that have a mix in the small and mid cap funds. One can be a growth style and one can be a value style. For example you may have a small cap growth and a mid cap value or the other way around. Next choose a good international fund. As you look around Morningstar you will find a graph that rates the performance of the funds you are looking at. This will help you to determine the funds to choose. We will spend more time on that in another article. As you become more experienced, you may want to branch out a little, but remember, keep it simple and do not try and make your portfolio complicated. No more than 5 – 7 funds is needed.

It is also a good idea to check the mutual funds holdings. The mutual fund you choose should have investments in more than 10 stocks and should not have more than 10% invested in one particular stock. If the fund you are looking at is not diversified, you may want to rethink your selection.

You should also choose several different industries. Too many times, investors overweight their investments in the same industries. This increases your risk and is counter productive. Choose industries that are in vogue and are growing. If you like an industry that is not growing, wait, it will come back. It is not worth it to invest in an industry that is not going anywhere for a couple of years. Then you are just waiting and not growing.

Another mistake investors make is to not invest using an investment strategy. They take the time to set their goals but do nut use a well defined, appropriate asset allocation strategy that accurately reflects individual objectives. The selection of mutual funds becomes just a haphazard exercise. The investment ends up not doing what the investor intended. Take some time to plan, and then take some time to implement your plan.

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