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Successful fund investing doesn't stop with choosing the best funds. The next step is equally vital -- combining the funds into a rational investment plan.
It's also important to diversify your portfolio. Different kinds of stocks -- those of large companies versus small companies, rapidly growing companies versus undervalued companies, foreign versus U.S. -- take turns leading (and lagging) the markets. The performance divergences are unpredictable and often enormous.
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Over the long term, different types of stock funds tend to produce roughly similar results, although small-company stocks perform better (and are also riskier). The reason for owning some of each category is to smooth your portfolio's ups and downs.
How should you divvy up your stock money? Roughly 50% belongs in large-company funds, split between funds that invest in growing companies and funds that invest in bargain-priced ones. Put 25% in foreign funds, and divide the final 25% among small-company funds that invest in growth companies and value stocks. But you may have to make adjustments, as we do in our suggested portfolios, for funds that buy different kinds of stocks.
Go to suggested portfolios for 2006 >>
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