When Less is More

August 20, 2014 - Al
I once worked with a mutual fund collector. She owned more than 100 mutual funds, each holding about $5,000. Her actual performance was, well, not surprisingly, average. So no major worries there. And was she well-diversified? Yes, she was.
But there is also such a thing as being too diversified. Do you think she had a good handle on what she owned and why she owned it? Do you think she enjoyed the endless reams of paper account statements sent to her? Her portfolio was a source of stress.
Ok, her example is extreme. But it illustrates a few points if you want to simplify your investments (see Decluttered Investing for additional thoughts):
  • You can actually own several funds and still be poorly diversified. Think of those investors in the late 1990s who owned several mutual funds concentrating on technology stocks and other “growth” industries, many of whom lost significant money when those industry bubbles burst.
  • You probably don't need to dabble in investment products with complex strategies that often are high risk and high cost. Or products that are so specialized they are simple, but not diversified; for example, investing in one specific subset of one specific industry in one specific country. It’s not that they don’t have a place; it’s just that they are probably only suited for a small number of folks.
  • You don’t need to own more than one, or even a small handful of mutual funds to be well-diversified. It’s what the fund invests in that matters, not the number of funds you own.
So, to really keep it simple and still be diversified, look for what is known as a balanced fund that invests in many different types of stocks and bonds. Similar to balanced funds are target funds designed to either gradually reduce risk over time, or stay within a constant range from conservative to aggressive and somewhere in between.  Just one balanced or target fund might be all you need.
AC: 0212-5499

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