Hugh F. Doherty, DDS, CFP
Is it time to take an inventory of your mutual funds? How many are there? What are their investment styles? Is your mutual fund portfolio cluttered just like your desk? Have you owned some funds for so long that you have forgotten why you bought them? Are there some funds in the back of the drawer that you haven`t looked at in awhile?
Adding a new fund to your portfolio is far easier than reorganizing your fund portfolio and discarding inappropriate, redundant, or simply poor-performing funds. The answer to the question of how many mutual funds you should have in your portfolio is not just a number. But if you have many more than eight mutual funds in your closet, chances are you need to do some serious portfolio cleaning. Here`s why.
In order to be well-diversified, your mutual fund portfolio should be invested in domestic and foreign stock mutual funds and in fixed-income funds or income fund equivalents. Within the domestic stock market, your funds should cover large stocks, small stocks, and stocks in between.
Let`s stop and take a count. You should have one large stock domestic fund, one small stock domestic fund, one international large stock fund, one emerging market stock fund - so far, that`s four funds. Have we missed the mid-sized domestic stocks?
Well check your large-cap stock fund and your small-cap stock fund to see what they include. Usually, large stock funds leak down into the mid-size range and small stock funds push up into the mid-size range. If not, add a mid-size fund to avoid any portfolio gaps. Now we may be up to five, all of which are stock funds at this point.
If you want income and the diversification benefit of a fixed income fund, then a simple choice would be an intermediate U.S. government bond fund. This fund will capture most of the yield of longer-term funds with much less volatility when interest rates change.
One bond fund in a portfolio may make sense, but it is difficult to imagine the value of more than two bond funds. High-tax bracket investors often prefer growth through common stock funds rather than income from any other source. So, if you add a fixed-income fund to our count, we now have a total of six.
Should a portfolio of stock funds be diversified by style as well as size of stocks? Size, yes. Style, perhaps.
Many funds operate in more than one stock size range, and many use approaches that are classified as both growth (for example, investing in stocks with high earnings growth expectations) and value (for example, investing in stocks with low prices relative to earning and net asset values).
Do you need a value and growth fund in each stock size category? No. One value fund - and it might be the large stock fund - and one growth fund - covering the mid-sized and small stock area - provide coverage of size and style. A large stock index fund will be both growth and value, and more extensive indexes will cover value and growth for more stocks and stock size ranges.
Understanding fund style and stock size characteristics will help prevent duplications and unnecessary run-up in fund count. Now, back to our fund count. We left off at six with one fixed-income fund, or seven funds with two fixed income funds.
Add a money market fund and the counter clicks to eight. Be sure you can justify adding funds to your portfolio beyond eight. Make certain you need them, that they truly cover new ground in asset type, or investment style, and that the addition is meaningful.
To determine your investment style and risk tolerance, call Anne Morris at (800) 544-9653 to obtain a copy of an Investment Profile Questionnaire.
Hugh F. Doherty, DDS, CFP, is a certified financial planner, national lecturer, financial adviser to the healthcare profession, and CEO of Doctor`s Financial Network. For more information about lectures, study club workshops, or consultations, you can fax to (732) 449-3229, e-mail to Dr.email@example.com, call (800) 544-9653, or visit the Web site at www.dr.hughdoherty.com.