The Seven Step Process of
Constructing and Maintaining
A Mutual Fund Portfolio

1. Decide Why You are Investing - Simply put, you need to know where you're going or you're likely to end up someplace else, and you might not like it there.
2. Define Your Investment Universe - The broader your investment universe, the greater your potential diversification and the higher your expected rate of return at any given level of risk.
3. Screen Mutual Funds - Select the comparison criteria you prefer and use them to screen for the best funds in each asset class in your universe. Select two or three from each class, as the best of class may not always work well together when their correlations are taken into consideration. In this case, a fund with a lower Sharpe ratio may make a bigger contribution to your portfolio and be the winning candidate.
4. Mutual Fund Selection - Assemble your selection into portfolios in a spreadsheet to see which combination makes the best portfolio. This can be tedious, as it involves many permutations and requires varying the weightings of the funds, which means even more permutations. But using optimization software will reduce the work involved. Your optimal portfolio will be the one with the highest Sharpe ratio.
5. Incremental or Lump Sum Investment? - If you're investing a lump sum, such as an inheritance or a 401-k rollover, you'll need to decide whether to invest it all at once or over a period of time. Quantitative studies indicate the investing a lump sum immediately is best, most of the time. However, investing a lump sum near a market peak or at the beginning of a protracted bear market could be hazardous to your wealth.
6. Purchase Mutual Funds for Your Portfolio - Having decide which mutual funds to buy and in what proportions, you now need to establish an account and populate your portfolio. Here's what you should look for:
   • Availability of mutual funds that meet your criteria.
   • Automatic sweeping of cash into a money market mutual fund.
   • No or low transaction fees.
   • No or lenient restrictions on switching between mutual funds.
   • 24/7 telephone support for those times when a simple online transaction won't do.
   • 24/7 telephone support for those times when something goes wrong with an online transaction.
   • A good online mutual fund screener.
   • Access to prospectuses online.
   • Online access to all of your account information including documentation.
   • Optional automatic investments and withdrawals if these are important to you. These options will only be available if you establish an account with a mutual fund company.
7. Rebalancing and other Portfolio Maintenance - Now that you have a portfolio, you need to care for it properly. Your asset allocation, i.e., the proportion of your capital you allocated to each fund in your portfolio, needs to be maintained. This is done by periodic rebalancing, i.e., selling shares of funds that have grown significantly beyond their allocation and investing the proceeds in funds that have declined below their allocation. You also need to watch out for any significant changes in your funds, such as:
   • Changes in management
   • Negative trends in performance
   • Style creep
   • Changes in fund composition
   • Market cap bracket creep
   • Always read the current prospectuses when you receive them so you will know if changes are taking place.
   • There's no need to be ruthless in the short term. You're a long-term investor (Right?) and short-term changes or fluctuations are usually not grounds for dumping funds with good long-term performance records.

Follow these seven steps to construct and maintain your mutual fund portfolio and you should be successful at achieving your financial goals.

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