I learned an expensive lesson back in 2000 when I had a large number of mutual funds. Thinking that I had diversification when in fact most of the mutual funds that I owned had the same stocks in their holdings. It is important to remember when you are investing that you need to own different mutual funds and they should be in different market segments to provide you with real diversification.
For example over the last several years small cap and mid cap mutual funds have been strong performers when compared to large cap stocks. Additionally, international funds and energy funds have done extremely well. However, making sure your mutual funds you own are really in different segments is very important to your diversification. Another example is the commodities such as gold which is up over 49% in the last 3 months.
Morningstar.com has a free online service that provides detailed information on mutual funds in regards to risk levels, stock holdings, and investment segments. When trying to select a top mutual fund for your portfolio it is important to look at the fund manager length of tenure at the fund, the risk level of the fund an you tolerance for risk, the past performance of the fund, and the worst individual performance years of the fund. For example if the fund is up and down as much as 25% per year can you handle this type of volatility.
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