Course 501: Constructing a Portfolio
Adding Mutual Funds to a Stock Portfolio
In this course
1 Introduction
2 The Fat-Pitch Approach
3 What Do the Academics Say?
4 How Many Stocks Diversify Unsystematic Risk?
5 Non-Market Risk and a Concentrated Portfolio
6 Portfolio Weighting
7 Portfolio Turnover
8 Circle of Competence and Sector Concentration
9 Adding Mutual Funds to a Stock Portfolio
10 The Bottom Line

In-the-know investors buy stocks. Those less-in-the-know, or those who choose to know less, own mutual funds. At least that's the rap when it comes to the stocks versus funds issue.

But investing doesn't have to be a choice between investing directly in stocks or indirectly through mutual funds. Investors can--and many should--do both. The trick is determining how your portfolio can benefit most from each type of investment. Figuring out your appropriate stock/fund mix is (you knew this was coming) up to you.

Begin by looking for gaps in your portfolio and circle of competence. Do you have any foreign exposure? Do your assets cluster in particular sectors or style-box positions? Consider investing in mutual funds to gain exposure to countries and sectors that your portfolio currently lacks.

Some funds invest in micro-caps, others invest around the globe, still others focus on markets, such as real estate, that have their own quirks. Stock investors who turn over some of their dollars to an expert in these areas gain exposure to new opportunities without having to learn a whole new set of analytical skills.

For example, there are several ways to invest internationally:

  • Purchase U.S. stocks like Wrigley and Coca-Cola that have extensive international operations.
  • Purchase international stocks that have U.S. listings or ADRs such as Cadbury Schweppes CSG and Unilever UL.
  • Purchase international stocks on a foreign exchange.
  • Own an international equity mutual fund.
Ultimately, your choice depends on your circle of competence and comfort level. While many may feel comfortable with picking their own international stocks, others may prefer to own an international equity fund.

Next: The Bottom Line >>


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