Course 210: Your First Fund
Seek Diversification
In this course
1 Introduction
2 Seek Diversification
3 Favor Large Companies
4 Go with a Big Family

Whether you're investing for a goal that's five or 50 years away, your first stock fund should be well diversified. That means the fund should hold a large number of stocks (100 or more) from a wide range of industries, or sectors. By looking at Morningstar's fund reports on Morningstar.com, you can find how many stocks a fund owns as well as which sectors it favors.

What's the big deal about diversification? Funds that own many stocks from many different sectors are generally more stable than funds holding few stocks from only one or two industries. For example, the average natural resources fund carried a standard deviation (a measure of volatility) of 31.1 in May 2011, while the average large-blend fund's standard deviation was a more sedate 22.4.

While you may own some of these more concentrated types of funds at some point in your investment life—say, to rev up your returns or to add some variety to your investments—they aren't suitable first-time investments. (We'll talk more about diversification and when you might focus on concentrated investments in later lessons.)

Next: Favor Large Companies >>


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