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How To Build Your Mutual Fund Portfolio
Posted By Ron On July 26, 2011 @ 1:00 AM In Investing,Personal Finance | Comments Disabled
A portfolio is simply an investment or group of investments designed to maximize returns while minimizing risk. A mutual fund portfolio is the same thing, an assortment of mutual funds designed to maximize returns based on your personal risk tolerance. To get started planning YOUR mutual fund portfolio:
Risk tolerance is your ability to handle (tolerate?) the inevitable declines in the value of your investments (no one needs “help” handling increases!). Risk tolerance is not actually a quantifiable figure but is instead a subjective evaluation that depends on both practical and personal factors:
Only invest  money you don’t need to cover your everyday bills and expenses (or anticipated expenses, like upcoming medical bills, college expenses, etc). The less you “need” the money you’re investing, the higher your risk tolerance.
Risk tends to decrease the longer you hold on to your investments. The shorter your time horizon—the amount of time you expect to hold your investments—the lower your risk tolerance.
Do you have a tendency to avoid risk … or seek it out? The more you can stomach risk, the higher your risk tolerance will be in terms of investing and the higher the potential reward.
Over longer time periods, risk and reward typically go hand-in-hand: the greater the risk you can tolerate, the greater your possible rewards. Based on your available funds, time horizon, and risk aversion, you can decide how aggressive or conservative your ideal mutual fund portfolio should be.
Asset allocation  is the process of buying various types of stocks, bonds, mutual funds, ETFs, or other securities in order to create a diversified investment portfolio. The relative risk and reward of a mutual fund generally depends on security type it holds. Based on the different risks associated with different types of funds, you can allocate your assets across different funds to make sure that your investment is exposed to the right amount of risk (and potential reward) for your personal financial situation.
When building your mutual fund portfolio, consider the type of account in which your mutual fund investments will be held. There are three main types of accounts:
You can hold mutual funds in just one type, or all three. The type of account in which you choose to hold each fund should depend on the tax advantages of the account and the tax-related traits of the fund, as explained below.
With tax-deferred accounts, investors are allowed to delay paying taxes on investments they’ve made for specific purposes, such as retirement. The most common type of tax-deferred account is the traditional IRA. If you own mutual funds in a tax-deferred account such as a traditional IRA, you won’t pay taxes on the interest or dividends that the fund pays, or on the capital gains taxes the fund incurs, until you begin withdrawing from your account, usually after age 59 1/2.
Tax-free accounts let you make after-tax contributions into investment accounts that can then grow tax-free. The three most popular types of tax-free accounts are Roth IRA, 401(k) , and 529 accounts (college savings).
Most general investment accounts are taxable accounts, which offer no special tax advantages.
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