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Course 308
Adding Mutual Funds to a Stock Portfolio


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.

This course will cover how funds can improve a stock portfolio. Portfolio 309 will address the opposite: how stocks can embellish a fund portfolio.

Funds Provide Stability

More than 2,000 stocks (17%) in Morningstar's database returned over 20% in 2011; only 1 domestic U.S. stock funds did the same. But how many U.S.-stock funds lost more than 20%? Only 31. And how many stocks lost a fifth of their value in 2007? More than 5,600.

Funds Guide You Down the Road Less Traveled

Many stock investors favor the big-name technology, telecommunication, and services stocks--such as Microsoft(MSFT)and Wal-Mart (WMT)--that keep our economy humming.

But what about micro-caps such asMeasurement Specialties (MEAS)or foreign companies such as Japan'sNippon Telegraph & Telephone (NTT)? Such off-the-beaten-path securities aren't within most stock investors' purviews. Nor are such stocks easy to analyze, buy, or sell.

That's where a mutual fund can help. 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.

Funds Balance Your Investment Style

But there will be a time when your style falters, at least temporarily. Biotech underwent a fierce correction in early 2000, and investors who stashed their money in Buffett's wide-moat, easy-to-understand businesses found it tough to profit in 1999. Tech's loudest cheerleaders silenced their rah-rahs as Nasdaq spiraled in 2000. Those holding REITs and financials felt the pain in 2007. And in 2012, energy and basic materials stocks have lagged most other categories.

How to Add Funds

Figuring out your appropriate stock/fund mix is (you knew this was coming) up to you.

Begin by looking for gaps in your portfolio. Online portfolio tools like's Instant X-RayandPortfolio Managercan help you in this analysis.

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, sectors, and styles that your portfolio currently lacks.

Quiz 308
There is only one correct answer to each question.

1 In any given year, which type of investment is more likely to lose 20% of its value?
a. A U.S. stock
b. A U.S. stock fund
c. Both are equally likely to lose money
2 Why are U.S. stock funds generally less volatile than individual U.S. stocks?
a. Because they own bonds
b. Because they own stocks and bonds
c. Because they own a collection of stocks
3 Why are micro-cap stocks and foreign securities usually best owned through a mutual fund?
a. Because they're more difficult to analyze than large U.S. company stocks
b. Because they're more difficult to buy and sell than large U.S. company stocks
c. Both A and B
4 If you work in the technology field, know a lot about tech stocks, and have a portfolio filled with them, what might you consider?
a. Learning how to analyze non-tech stocks.
b. Investing in mutual funds that focus on non-tech sectors.
c. Nothing. Technology is the future.
5 What's the optimal mix of stocks and mutual funds?
a. Half stocks and half mutual funds
b. 75% stocks and 25% mutual funds
c. The mix is up to you.
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the quiz page.
Copyright 2006 Morningstar, Inc. All rights reserved.
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