Smart Basic Investing Strategies Require Diversity Of Market Capitalization And Holding Types.




So how about you?

Has your basic investing strategy resulted in a portfolio diversified across market capitalization and holding types?

Or... do you even know?

If you don't know... don't feel bad... you are not alone.

Many investors... as well as too many advisors... believe that diversity across the broad asset classes... is diversity enough.

They therefore... stop short.

They believe they are well diversified.

And then... they continue on... potentially exposed to more investment risk than they are aware of.

A smart basic investing strategy will define investment diversification much more broadly than mere asset class diversity.

A truly diversified portfolio will exhibit diversity across five major areas of diversification.



So how can you know the degree to which you are diversified across market capitalization and holding types?

Many investors utilize a very simple and convenient tool known as... the style box.

The style box is now widely used to help construct and monitor portfolios.

The box provides investors with a tool to classify funds based on their underlying holdings.

That said... and without getting too technical.

Let's take a look at the style box grid and how to use it.

In 1992... Morningstar introduced it's now famous... style box grid.

The Morningstar style box is a nine-square grid that gives you a quick and clear picture of a fund's (or a portfolio's) investment style.

The style box classifies funds (or portfolios) by whether they own... large-cap, mid-cap, or small capitalization stocks... and by whether those stocks have... growth or value characteristics... or land somewhere in between.

There are two basic versions of the Morningstar Style Box.













The first version... illustrates the combined "best fit" representation of the fund with a "black square".

The second version... in addition to a "black square"... also shows numbers representing the weighted percentages of the fund's (or portfolio's) total holdings that fit the characteristics of each square.

Sidebar:

Please note that the two grids shown above are intended to merely illustrate the two versions of Style Box.

They are not intended to both be representative of the same mutual fund or portfolio.

When you look at a fund's (or portfolio's) Morningstar style box... you immediately get some insight into the overall investment strategy of either the fund or the portfolio.

  • A growth portfolio will mostly contain companies that the manager believes have the potential to increase earnings faster than the rest of the market.

  • A value orientation, on the other hand, means the manager buys stocks that he considers undervalued, but that could eventually see their worth recognized by the market.

  • A blend fund will mix the two philosophies: The portfolio may contain growth stocks and value stocks, or it may contain stocks that exhibit both characteristics.



Because the style box shows you how a fund or portfolio is actually invested... you can use it to get an idea of asset allocation, diversification, and risk.

A fund that mostly owns smaller lesser known stocks is bound to be more volatile than one primarily holding large well established names.

The style box allows you to quickly see where a fund or portfolio lands.

The style box grid... simply and visually... displays a fund's or a portfolio's current investment style and investment strategy.

Morningstar's Portfolio X-Ray Tool provides a great way to evaluate market capitalization, investment style, and the overall diversity of either a single fund or of a portfolio of funds.

Click here to evaluate your current or considered portfolio of investments using Morningstar's Portfolio X-Ray Tool.

A prudent basic investing strategy will typically suggest a fund or portfolio that is invested to some degree in all nine boxes of the style box.

In other words... a diversified basic investing strategy of... investment across company sizes and across investment types.

Whether you are evaluating your current holdings or whether you are researching and constructing a new portfolio... the Morningstar style box can help assure a result consistent with your diversified basic investing strategy.

"Because It Matters"... Jim

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