After screening for those five factors, we applied some subjective standards, eliminating, for example, a few funds on the basis of their tiny size. We also made some judgment calls about the kinds of mutual funds we would focus on. While there are far more types than most people would imagine possible, many (like precious-metal, natural-resource, and real-estate-based funds) are probably too risky for entrepreneurs who are already taking their bumps with their businesses. So we decided to focus on five categories with somewhat lower risk profiles: growth stocks, short- to intermediate-term bonds, aggressive (or small-cap) stocks, long-term bonds, and international stocks.
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A step-by-step guide to using the list
If 20 funds seem too many to choose among, don't throw up your hands in despair. Before starting, identify your investment needs according to your company's stage of development.
Stage one is fairly simple to recognize. Your company either is a start-up or is still so young or vulnerable that cash flow can get crazy sometimes. Your own paychecks are far from predictable, and it's tough for you to save a dime (without worrying about having to plow it back into your business).
That's the time to take baby steps as an investor. It's certainly a good idea to start trying to put aside at least a small sum, preferably in an investment that's as different from your company as possible. But let's be realistic. Your fledgling company will have to stabilize to some degree before that can happen.
When you're ready to start, choose one or two funds that will accept small initial purchases or small automatic monthly investments, in which a set amount is deducted from your checking account. With all the risks you face in your young company, you need a safe mutual-fund investment. Stick to the "short- to intermediate-term bond" and "growth stock" fund categories on our list, and make small investments whenever you can. If monthly savings are too difficult at this stage, try to make a larger, year-end investment at bonus or tax-refund time.
Stage two is harder to identify because it creeps up on many business owners. Think of this stage as stability. You've started paying yourself a regular, maybe even competitive, salary; your company's cash flow is steady enough that you probably won't need to raid your personal savings when unexpected glitches occur.
"When your company begins to seem stable enough that you can envision leaving your investment in place for five years or longer, you can carry out a full-fledged mutual-fund investment strategy," advises Steven Enright, a fee-only (no commissions) investment adviser and certified financial planner based in River Vale, N.J. At this point, you should try to invest a fixed sum each month, ideally by spreading it among a range of funds with different investment goals.
By investing in three to five mutual funds, chosen from different fund categories, Enright explains, business owners can carry out a full-scale diversification campaign. That's important because the more diversified your investments are, the more you're protected against downturns in any one sector of the economy or investment market. (Here's another quick tip: If your goal is, as it should be, to achieve diversification, don't make the mistake of choosing multiple funds within the same category on the list. That will concentrate your risks.)
Stage three is when your company has a solid record of growth and profitability. You're finally coming close to paying yourself what you're worth. Those end-of-the-year bonuses are the stuff you've always fantasized about. Best of all, your company's creditworthiness is so well established that when cash crunches happen -- as they always will -- you can simply tap your credit line. Your savings and investments are finally safe.
This is the time to complete your mutual-fund portfolio. Enright recommends choosing 10 funds -- 2 from each investment category. In the interests of complete diversification, make sure the funds you select represent a broad range of investment styles.
This article launches Inc. 's new Personal Portfolio section, in which finance editor Jill Andresky Fraser (incfraser@aol.com) looks at specific money-management issues facing company builders.
GROWTH STOCK FUNDS
Think of this as a catchall category, whose funds invest mainly in the stock of large, well-capitalized U.S. companies.
William Blair Growth
With a heavy emphasis on controlling risks -- even while looking for growth opportunities -- this fund invests in companies with stable, predictable earnings and reasonable stock valuations. It's cautious but quite profitable, perhaps because William Blair relies on two portfolio managers.
Morningstar rating: 5 stars
Total 12-month return: 34.92%
Total 5-year annualized return: 18.25%
Morningstar 5-year risk rating: 0.83
Smallest initial purchase: $5,000
Smallest automatic investment: $1,000
Telephone number: 800-742-7272
Mutual Qualified
With a goal of achieving capital appreciation, this fund invests primarily in undervalued common stock, preferred stock, and debt securities. It definitely takes some chances, including investments in so-called junk bonds, but Mutual Qualified has historically outperformed most of its competitors.
Morningstar rating: 5 stars
Total 12-month return: 22.98%
Total 5-year annualized return: 18.08%
Morningstar 5-year risk rating: 0.45
Smallest initial purchase: $1,000
Smallest automatic investment: $1,000
Telephone number: 800-553-3014
Janus Growth & Income
Just as the name indicates, this fund makes money for its investors by looking for long-term growth of capital and maximum current income. Typically, 25% of investments are targeted for each of those two categories, with other investments consisting of foreign stocks, options, futures, and other securities.
