Course 106: Core vs. Noncore Investments
What Makes a Core Mutual Fund?
In this course
1 Introduction
2 What Makes a Core Mutual Fund?
3 What about Core Stocks?
4 How Big Your Core Should Be

The stock market is dominated by large companies; such firms account for roughly three fourths of the value of the U.S. market. Assuming that you’d like your portfolio to participate in the movements of the broad U.S. market, as opposed to just a small sub-section of it, you’ll want to use a large-company-focused fund as your core stock holding.

Large-cap blend funds, which own big companies with middle-of-the-road stock prices, are core stalwarts. Large-blend funds usually don't lead performance lists, but they're even less likely to bring up the rear. They're boring, which makes them ideal core choices.

For cautious investors, a conservative large-value fund may be an even better option. These funds invest in big, well-established companies with stocks that are cheap relative to those of other large caps; they may also focus on dividend-paying firms. Historically, that focus on slow-growing, generally steady companies has earned large-value funds the lowest risk scores of any of the Morningstar style categories.

But wait. If large-cap funds are good core holdings, why not large-growth funds? These funds typically focus on large companies with the potential to grow more rapidly than the broad market.

Although there are exceptions, large-growth funds don't have the best temperament for core holdings; they tend to have bigger mood swings than their blend or value counterparts. Their highs are nice--they mean higher returns at certain points in time--but when they're down in the dumps, that spells bigger losses than you might want at the heart of your portfolio.

If the allure of large-growth funds is just too powerful, go ahead and invest in one. But invest in an equal amount of money in a large-value fund, too. Owning both is about the same as investing in a large-blend fund.

You might want to include a foreign-equity fund as a core holding, too. That way, you aren't staking everything on the U.S. market. The fund should focus on the world's developed markets, investing in leading companies, just as your core U.S. funds do. Before investing in a foreign fund, be sure to take Funds 305: Choosing an International Fund, Part 1 and Funds 306: Choosing an International Fund, Part 2.

Finally, a bond fund might make a good core holding if your asset allocation calls for it. Stick with bond funds that invest in high-quality securities. Focus on those that favor intermediate-term bonds. Why? Because the longer a fund's maturity, the more volatile its returns generally are. You can capture much of the return of a long-maturity fund with an intermediate-maturity fund, but with a lot less volatility.

Before investing in a bond fund, be sure to take Funds 307: Examining a Bond Fund's Portfolio, Part 1 and Funds 308: Examining a Bond Fund's Portfolio, Part 2.

Next: What about Core Stocks? >>


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