Are you active in investing? Are you practicing diversified portfolio management? If you are, or if you are not, then here are some helpful tips for your portfolio. I recently read an article from Consumer Reports where one of their editors went to a financial planner and got a plan for a diversified portfolio. While I have always stated a well-diversified portfolio is essential to your financial well-being, this took it to a whole new level. The editor was advised to purchase 16 different mutual funds.
Most people would not be able to follow and keep up with that many different stocks much fewer mutual funds that ay have hundreds of stocks in their holding. In fact, many tracking sites do not even allow for 16 stocks to be displayed on a single page for easy tracking. So here is an example of being over diversified. Sometimes less is more, and we will look at how that might be.
While it was far from a certainty in 2008 and 2009 that a diversified portfolio would save you. Now we all know it did not save many of us at all. That was a once in a lifetime disaster that I hope to not see again for a very long time. Though I am sure we will always have the ups and downs that the markets are capable of let’s all hope we do not see a repeat of 2008 and 2009. But that does not mean you should not be prepared because at some point I am fairly sure it will happen again.
In this type of portfolio and with so many mutual funds the chance that there is some severe overlap does exist. With some mutual funds owning hundreds of companies, it is easy to see that there is the distinct possibility that there will be duplicative companies owned. In a more simplified approach is to own three or four Exchange Traded Funds (ETF’s) that cover your desired asset classes. Also, it is not always wise to own actively managed funds that closely mirror that of an indexed fund. There is no need to pay for additional management fees when you do not have to. And many actively managed funds do mirror their less expensive passively managed funds so beware.
Also, the article stated that the multi-fund portfolio did not perform much better than a 60/40 stock to the bond portfolio from 2004 to 2014. This shows that you do not need quantity over quality to have a well performing and diversified portfolio. More is not always better in these instances. In many instances, the less cluttered portfolio does about the same as the one in which 16 mutual funds are owned.
One thing that is recommended by many planners is to understand what it is you own in your portfolio. One way to do this is to join Morningstar for at least the 14 day free trial period to get an idea of your standing. And to do this you simply use their X-Ray feature that will detail the companies owned by various funds. By doing this, you will be able to see any potential overlaps in ownership and duplication.
It is always wise to be diversified but not at the expense of the overall health of your portfolio. As you may or may not be aware the more you own, the more, you have to manage. And just because you may have a financial planner or advisor does not excuse you from having to know and understand the investment. Many people have lost a lot of money to poor planners because they did not think that they had to know and understand their holdings. Warren Buffett says it best and I will paraphrase here, “own only what you know.”
If you need, help diversifying then seek a professional or join a site such as Morningstar. While it does cost a fair amount if you are serious about your portfolio and your holdings then it very well may be worth the cost.
For more information or any questions feel free to contact me anytime.
