If you ask ten different investors what’s at the “core” of their portfolio, chances are you’ll get ten different responses. But you’ll probably hear some common themes, such as “long-term investments,” “more stable securities,” or perhaps even specific asset classes like “stocks” and “bonds.”

There isn’t one right answer, but the general idea is that core investments form the basic building blocks of an investment strategy – asset classes like small, mid and large cap US and international stocks, US and international bonds and perhaps even emerging market stocks. Many investors use index ETFs and mutual funds to get access to these exposures because they provide diversification and require less ongoing attention than a portfolio of individual securities.  In ETFs alone, there’s approximately $680 billion invested in funds that offer core exposures, which accounts for nearly 41.8% of the US ETF market.  So far in 2013 we’ve seen $53.6 billion flow into US core ETFs (as of 10/23/13).

Despite the crucial role that core plays, many investors give it a lot less thought than they do the other parts of their portfolio. While building your core shouldn’t be an arduous process (in fact, here’s a tool that makes it pretty simple), you do want to make sure it’s working as hard as it can for you – after all, it is the foundation of your portfolio. There are a few pitfalls that we repeatedly see; issues that over time can cause your portfolio to stray from its course. Here are two common examples:

Portfolio Gaps

When you look at the index funds in your portfolio, chances are you’ll see the names of a variety of different index providers, such as S&P, Russell and MSCI. What we often see is investors choosing the benchmarks they’re most familiar with without thinking about how those indexes fit together.

For example, many investors will buy an S&P 500 fund and a Russell 2000 fund, thinking that the two indexes together make up the entire US market. But if you look at the illustration below, you’ll see that something is missing from that combo – mid cap exposure. If you want to include US mid cap stock exposure in your core, you would need to buy a separate fund.

For illustrative purposes only – market cap spectrum not to scale.

Showing Page 1 of 3