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Anatomy of a Diversified Portfolio

Tips on how to build a balanced mix of funds.

Pundits and other know-it-alls often blithely urge us to build a diversified portfolio of stock funds, but they rarely -- if ever -- show us how.

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In a way, these folks are dumping wood, hammers and saws on our lawns with a note saying they'll pick up the ark on Wednesday. Building a diversified portfolio from the ocean of funds out there may not be easy, but we'll at least give you a blueprint.

The idea here isn't to focus on whatever sector or style happens to be working this year or that you think might work next year. Rather, the goal is to spread your money among a broad range of funds. That keeps you from losing your shirt whenever one popular corner of the market collapses, ¿ la tech stocks since the


frothy peak in March 2000. It also gives you exposure to whatever style is working at any given time, smoothing out your portfolio's performance as Wall Street's harsh winds inevitably shift.

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We've analyzed the Wilshire 5000 Total Stock Market Index to show you what percentage of your stock-fund money should be in various styles like large-cap growth or small-cap value, for example. Last week we

showed you how you can get this diversification with just one or two funds, but you also can get there via a blend of different funds. If you don't know where you're invested now, use Morningstar's handy

X-Ray tool to see where you might be over- or underweighted.

If you're shopping for a fund or two in categories you've ignored till now, just click on the name of any style in our Fund Investor's Baedeker to see the most recent Big Screen column highlighting some solid candidates in each. Beyond diversified U.S. stock funds, we've also included screens of foreign stock funds, bond funds, sector funds and balanced funds, which hold both stocks and bonds.

How much money you choose to put in these different categories is up to you, but you can use this chart as a handy benchmark. At the very least, print it out and wave it at the TV when some talking head tells you to "diversify," "match the market" or "adopt a neutral stance."

Ian McDonald writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to, but he cannot give specific financial advice.