Investing in Style—Think of it as financial fashion: Each mutual fund has its own investment style. Understanding what gives it ‘that look’ is key to staying on top of your portfolio.

By Mark Druskoff

When it comes to investing, trying to keep up with the Joneses might just put your savings in jeopardy. Given the mind-boggling array of choices, it might seem both wise and convenient to follow what others are doing. But what works for neighbors or co-workers may not work for you. Your investment selections should reflect your goals and risk tolerance, both of which are unique.

“Not everyone fits the same mold,” says Scott Schaefer, a Thrivent Financial representative in Edmond, Oklahoma.

Today, more than 5,000 companies are actively traded in the U.S. stock market. Some sell clothes, others build computers. Some own big plants and employ many people, while others own very little and emphasize brainpower.

Each company presents a different set of risks and opportunities for investors. Mutual funds own shares in a range of companies to minimize the risk from any single firm; at the same time, they often focus their portfolios in segments of the market that share a set of broad financial characteristics, as energy companies do, for instance. To view a snapshot of where a mutual fund places its assets, you can refer to its style guide (see below).

The style guide does two things. First, it pinpoints the relative size of the companies in a mutual fund’s portfolio—small, medium or large—based on market capitalization or “cap.” The cap is determined by the price of each share and total number of shares a company has. For that reason, a company’s market cap changes constantly, and companies can move from small cap to large cap, or large to small, depending upon the performance of their stock—which, over time, should reflect the success of their business operations.

Second, the guide highlights a mutual fund’s investment philosophy—value, blend or growth—as determined by the operating characteristics (other than size) of the companies in which it invests. These characteristics are sometimes shared by many of the companies in a particular industry or market sector.

In the late 1990s, technology and Internet-related companies, then considered growth stocks, had a great run. In recent years, industrial and basic industry companies, traditionally considered value-oriented stocks, have emerged as strong growers and performers.

“Today, growth managers are buying steel and oil companies, and value managers are buying software companies,” notes David Francis, head of equities at Thrivent Financial for Lutherans.

Investors should evaluate fund styles and objectives while assembling a well-balanced portfolio that aligns appropriate risk and reward with their long-term objectives. And according to Francis, there are plenty of opportunities out there.

“As a hypothetical situation,” says Francis, “equities might take a downturn in the next five to 10 years. A younger investor with a longer time horizon is going to want to stay invested in equities. Investors with longer time horizons generally can assume higher levels of risk due to market volatility. You just don’t want to have all of your eggs in one basket.”

Beware of emotions when it comes to investing, warns Francis. “Where a lot of people got in trouble in the late 1990s was they rode the tech-growth trend too hard. Then the market changed. All of a sudden, they found themselves overcommitted to an overpriced market sector.”

And watch out for fear, adds Schaefer. “People sometimes buy on greed and sell on fear.” Creating a plan ahead of time helps investors make decisions based on proactive rather than reactive behaviors. It helps them take control of the process rather than it taking control of them. When working with your Thrivent Financial representative to structure your plan, you can use a mutual fund’s style guide to help make the right decisions. “It’s all about having a plan,” says Schaefer, “and working that plan.”

Mark Druskoff is a freelance writer from Minneapolis, Minnesota.

Investing In Style   |   As You Near Retirement   |   In Retirement   |   How to Read a Style Guide