Once you have picked a starter fund, keep adding to it over time, and gradually build up your commitment. Concentrate first on meeting your allocation goals among the three major market segments—cash, bonds, and core stocks.
If you started with a balanced fund, you may want to next add a stock fund (once you can meet the minimum) to increase your percentage investment in stocks, and perhaps an intermediate-term bond fund after that; you can then start the switch out of the balanced fund.
If you started with a core index fund, you could next add the minimum to an intermediate-term bond fund (in fact, you will have created your own "balanced" fund).
At what point do you start diversifying beyond the major market segments—in particular, when should you consider diversifying your stock portfolio beyond the core?
The answer will be a function of:
For instance, let's assume the mutual funds you are eyeing have a $2,000 minimum initial investment. If your goal is 10% each to international and small stocks, you should start adding other funds once your stock portfolio has reached $20,000; if you added those funds earlier, you would have a greater commitment to those segments than planned.
If you are a more aggressive investor—for instance, you will be committing only 50% of your stock portfolio to the "core" market portfolio, and you want to divide the remainder of your portfolio to small stocks and international (25% each), you could start adding these funds sooner—you could start when you have accumulated as little as $8,000 in your stock portfolio.
Which segment should you add first? Pick the one to which you will be committing the larger percentage. What if you plan equal commitments? You could choose either one, so pick the fund that you are more comfortable with or one that has other attractions (for instance, perhaps lower minimums).
Continue to Step 6 »
