Friday, March 21, 2008

Poll: How Many Mutual Funds Do You Have?

The thing that surprised me about the comments on my investment portfolios was that a couple of commenters thought I had too many different mutual funds. This had just never occurred to me-- I always figured it was good to diversify. It's not like I've deliberately aimed to have the largest possible number of funds, but each time I make a Roth IRA contribution, I tend to just buy a new fund rather than investing in more shares of a fund I'm already holding.
Other commenters were of the opinion that it doesn't matter how many funds you have as long as you can keep track of them, and as long as your portfolio has a good allocation mix for your level of risk tolerance. Keeping track of my funds is fairly easy-- E*Trade and Fidelity have good screens where you can see at a glance how you're doing. But what does bug me, right now, is having to enter all my investment transactions into Quicken manually, since Fidelity no longer supports downloads for the version of Quicken I'm using. So, every month, I slog through entering about a dozen buy and reinvest dividend transactions to keep my records up to date.

But let's hear from everyone else on how they allocate their investments:

How many mutual funds do you currently invest in?
More than 20
Free polls from

Meanwhile, looks like I will be getting a detailed look at my portfolio from my friendly neighborhood economist (if Australia counts as neighboring, when you're in blog-land). My pal Moom has written a guest post for me in the past, and now he's going to tell the world what he thinks of my investing strategy!


Working Rachel said...

The problem that I think previous commenters were picking up on is that you're *not* really diversifying. Buying several mutual funds in the same asset class (such as midcap stocks) actually creates overlap rather than diversification. Say you have three midcap stock funds, and each of those funds has some of its holdings in Company A. You're invested three times over in company A, so when Company A falls or rises, you feel the effects three times over. Which is what diversification is supposed to prevent.

Increasing the number of funds does nothing to help your diversification unless they're all different types of funds. A portfolio with a bond fund, an S&P index fund, a small-cap equities fund, a real-estate fund, an Asian markets fund, and a money market fund would be diverse (though maybe not in the right ways). A portfolio with six different U.S. index funds would not be.

(That's all meant in a very friendly way; I'm certainly no financial advisor. The detailed look at your portfolio will be interesting!)

mOOm said...

I have at least 22 including closed end (active exhange traded) funds and ETFs. More than 22 when counting retirement class and non-retirement class Australian funds separately.

Anonymous said...

@Working Rachel, well-said. That is in fact what I was getting at when I posted that Mme.X has too many funds. There is a lot of overlap, and all the different funds are doing is making the underlying asset allocation more opaque.

Additionally, I want to stress again that you are paying at least twice the expense ratio that you need to be, with many of your funds at about a 1% ER.

uzvards said...

Some fund families - I'm familiar with Vanguard, T.Rowe Price and Dodge&Cox - impose low balance fees if you've got less than some amount (e.g. $10K) invested in a particular fund. Though they would forfeit this fee if your total investment with the company is large enough (>$50K).

So if you'll invest your 2007 Roth IRA $4K into a new fund, you may pay $12-15 more than those who are more persistent (first year, and possibly second year too).

Andrew Stevens said...

I just want to gently correct some details of Working Rachel's comment. It is not the case that you'll feel this effect "three times over" as she says. Let us say you have $30,000 which you want to invest in mid-caps. You can either 1) invest all of it in one mid-cap fund (which is what I do and it sounds like most of the other commenters here) or 2) you can spread it out among three different mid-cap funds.

Whichever option you choose, if Company A is invested in in all three funds, you'll feel the exact same amount of pain. Using Option 2, you'll feel it three times, but only 1/3 of the amount each time. Using Option 1, you'll feel it only once but for the full amount. So that's not really an issue. The fees are also not really an issue, so long as all three funds pay comparable fees (not the case for your portfolio, by the way). If you pay a 1% fee, you'll either pay 1% on the full $30,000 or you'll pay 1% three times on $10,000 each and that's obviously the same $300 either way.

Working Rachel is correct that having multiple funds targeting the same asset class does not really help diversification and, to the extent it does, I don't think it's a good kind of diversification. You're diversifying management essentially. If you believe management skill really matters, it seems to me that you're best off just choosing the best manager you can and betting it all on him. The problem I have with this is that I'm not sure I can detect management skill. (I'm not necessarily saying it doesn't exist.) E.g. Bill Miller became a star when his fund beat the market, sometimes by wide margins, for 15 straight years. In the last two years, he's gotten killed each year and he just took a huge bath recently since he made a big bet on Bear Stearns which didn't pan out. So this is why I stick to index funds. It's not that I think individual management skill doesn't exist, merely that I am not competent to discover who has it.

Now, I do agree that you should probably just pick one fund for each asset class using your best judgment. I prefer this for purposes of simplicity in determining my overall holdings. However, if you don't mind a complex portfolio (like Moom), I think there's a lot to be said for having 22 or more funds, with each one targeting a particular asset class.

My own portfolio is pretty simple since I don't want to spend a lot of time on it. So I have a total of only seven asset classes (Russell 1000 Value, Russell 1000 Growth, the Russell 2000 small-cap, an international developed world equities fund, an international emerging markets fund, a REIT, and an aggregate U.S. bond fund) and therefore seven funds (actually more than that since my 401k invests in different funds from my other holdings, due to restricted choice). I plan to expand this eventually into international bonds and perhaps slice and dice the small-cap and international funds into smaller components.