Perplexing Portfolio Issues Explained

Generally, yes. The different letters after a fund name distinguish various ways a fund may be sold. Some letters mean there will be a front-end charge or "load." Some will charge you on the back end. But no matter which share class you own, the fund's portfolio will be the same. That means if you read the analysis or check the historical performance for "A" shares, that information will also apply to your "I" shares. For more on share classes, click here.

Dear Sue,

Although I understand the reasons for investing in different styles, I do not wish to invest in funds in each part of the style box. Frankly, I'm not sure why one should consider doing so. However, currently I am re-examining my portfolio and trying to judge the pros and cons of investing in one large-cap blend fund as opposed to one large-cap value fund and one large-cap growth fund. What do you think?

Good question. Many people are under the mistaken assumption that investors should try to hold something in each of the squares in the style box. To me, the style box is more of a diagnostic tool. I like to see how a portfolio falls in the different boxes because it tells me something about risk tolerance and performance expectations. For example, if an investor's holdings are "bunched up" in and around the large-value corner, I'd guess he or she is on the conservative side and perhaps looking for income. On the other hand, if I saw a lot of holdings in the small-growth corner of the stock style box, I'd say the investor wanted to take on a strong dose of risk and had the stomach for the extreme ups and downs typically encountered in that area.

I don't think using a fund that covers many styles is better or worse than building a portfolio with multiple funds in different styles. For example, if a fund like  Vanguard Total Stock Market Index makes up a core part of your portfolio, it may be all you need. It crosses market-cap sizes as well as styles. It's also simple and elegant, and there's nothing wrong with that.

If you like to "tilt" your portfolio a little toward the growth style or the value style, you may be happier with funds that are distinctly in one style or the other. This will give you more control over how much of each to hold.

So, to answer your question, first I would take the time to pinpoint your expectations for the portfolio. For example, how much risk is appropriate, and is growth the primary focus or do you want income, too? Then you can look at how your portfolio spans the various style boxes and come to some decisions about whether you're in the "right" types of investments to meet your goals. Whether you execute through a "blend" fund or a combination of other styles is more of a personal preference issue.

Dear Sue,

I am a U.S. citizen. My godson lives in Brazil. I would like to make small contributions--perhaps $250 a year--into a fund for his education. Aside from sending his parents a check so they can invest on his behalf, do you know how I can set up an account for him using U.S. mutual funds?

Yes, although it is going to vary by the custodian you choose. I called Charles Schwab to see what it could do. As long as the child has a Social Security number, you can set up a custodial account (such as a Coverdell Education Savings Account or a Uniform Gift/Transfer to Minors account) and use your state of residence. If you use a large company such as Schwab, you can choose among many different mutual fund families.

When I called other brokerages, it was harder to get information. One company that shall remain nameless told me that it has a list of countries that it just won't do any business with--Brazil was not on that list. So you need to talk to the custodian you wish to use (such as Fidelity, Vanguard, Schwab, etc.) to see if it can set up that type of account.

One other word of advice--the U.S. tax advantages of a Coverdell or UTMA account may not apply if the child lives and goes to a school outside of the United States. That doesn't mean the money itself wouldn't help--just that the tax breaks may not be available.

Dear Sue,

I wanted to know if you have written about individuals setting up investment policy plans. I understand them to be like a mission statement--a sort of, "here’s what I want to do with my money" document. If you have written something on this, I would appreciate if I could get some information on how to put one together. Also, would I need to hire a financial planner to get this sort of document done?

You are in luck! Here's a link to my Creating Your Investment Policy Statement article. You may also be interested in how to apply your IPS when rebalancing your portfolio. For that, read Getting Your Portfolio on the Right Track. And no, you don't need a financial planner to create this document.