FYI: Q: I have seven mutual funds in my retirement savings account that invest in a broad range of stocks (large, mid-, small-caps, domestic and international) and bonds, plus real estate and gold. I'm now looking to add an eighth fund or ETF to my portfolio. Any recommendations?
A: I'm sure there are people out there who would be more than willing to point to all sorts of funds and ETFs you could add to your portfolio: smart beta funds, thematic ETFs, low volatility funds. There's even an ETF designed to capitalize on the ETF industry itself.
Regards,
Ted
https://www.fidelity.com/insights/retirement/how-many-funds-to-diversify
Comments
Geez - What a dumb question (as worded). Almost by definition, I'd say the correct answer is: 2
However, you might correctly answer 1, since all mutual funds diversify their holdings to some degree.
Wonder who comes up with these headers. Maybe a computer?
My thinking is any benefit a good manager might bring to the table, and I think there are good manager/teams that do, is diluted at best and offset at worst by combining different management styles in the same asset class. The resulting 'average' of multiple funds, by my thinking, would have little chance of beating the corresponding index benchmark.
FWIW, I use mostly managed funds in my self-managed portfolio. I just think it is counter productive to research and purchase a fund with management you are willing to spend money on and then hedge their ability by mixing that fund with 3 or 4 other styles. (I also know this might be a minority opinion on this board).
Different strokes for different folks. It will always come down to ones investing comfort.
Derf
I think the question is more how many funds do you 'want' in order to feel comfortable about your portfolio rather than how many do you 'need'. Investing is way more psychological than it should be sometimes.
A few excerpts from an article on the subject:
- A 747 can take off with two out of four engines out. A 737, 757, 767 and 777 can take off with one out of two engines out. A 727 can take off with two out of three engines out at sea level ...
- The 777 flight critical systems are quadruply redundant. There are 4 flight management computers, located in different parts of the airplane (so a collision will not take out all of the electronics). If the flight management computer system fails catastrophically, then the pilot can still use the autopilot to fly. If the autopilot fails, the pilot can still fly the airplane by hand.
- The 747 has 4 main landing gear struts. The 777 has 6 wheels on each main landing gear and has redundant structural elements controlling the main gear.
- The 747 has a quadruple redundant hydraulics. The DC-10 has triple redundant hydraulics. Why 4 instead of 3? It was a design decision back in the late sixties. But.... one day, a 747 took off from San Francisco airport and struck a light tower at the end of the runway. That took out three of the four hydraulic systems. The pilot was able to fly the airplane over the pacific, dump fuel, and return to the airport safely. This is not to disparage the DC-10, which is a fine airplane. But the 747 is better.
- The new airplanes have only two engines. But they also have a little gizmo called a Ram Air Turbine, or RAT. If the airplane should lose both engines in flight, the RAT will pop out of the belly of the airplane and power the electronics and hydraulics long enough for the pilot to make a dead-stick landing.
- The 777 has multiply redundant navigation systems. It has a strapdown inertial navigation system, which can measure acceleration and rotation yet it has no moving parts, so it can navigate without any outside reference. It also has a Global Positioning System receiver so it can navigate via satellite. It has the usual compliment of Automatic Direction Finders (ADF), Visual Omnidirection Range (VOR), and glide slope receivers, so it can navigate via radio. And finally, the pilot can always get on the radio and ask "where the hell am I?" ...
http://www.commercialventvac.com/fear.html
Note that what you need to fly isn't necessarily the same as what you need to fly comfortably and safely.
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Article doesn't mention reserve fuel. By law aircraft need to carry enough to be able to divert to an acceptable alternative airport and than circle that airport for 30 minutes. I've heard there's a bit of a tug of war between pilots who like to "top-off" their tanks beyond that requirement with a few extra tons "just in case" and airlines who discourage the practice because carrying the additional weight is costly. Your cash might represent that extra "topping-off". Expensive to carry ... Under some circumstances, priceless.
I've been asking this question for years
You are absolutely correct in that their aggregate performance over 3, 5 and 10 year timelines are very similar. However, their performance by year varies dramatically...evidenced by the 2016 performance of RPMGX at 6.3%, versus VETAX at 20.66%. This variability works in my favor I believe, given how I manage my withdrawals.
A portfolio comparison shows very little overlap...perhaps explained by the AUM difference.
All in all...I think having 3 good management teams in one space is a good thing...IMHO.
http://portfolios.morningstar.com/fund/summary?t=AOm®ion=usa&culture=en_US
http://portfolios.morningstar.com/fund/summary?t=AOr®ion=usa&culture=en_US
https://www.blackrock.com/investing/literature/product-brief/ishares-core-allocation-etfs-product-brief-en-us.pdf
10 "holdings", comprising 7600 stocks and bonds in different grouping proportions.