Tom Madell: How Many Is Too Many?

Ted

FYI: A reader recently raised an important question: Does an investor really need to own a lot of funds, or, can one still expect to obtain good results with a much more limited number of funds, or perhaps, even with as few as one? More specifically, it seems, he was indirectly questioning the need in my last Model Portfolios (Oct. '18) for so many funds (15 stock funds and 11 bond funds to be exact). Even my new "Recommended" stock and bond fund listings (see below), which now replace my Model Portfolios, now show 20 funds altogether.

Great question! Let's be honest - it would be highly difficult, and most likely unneccesary, for most investors to acquire each and every one of my recommended funds. (Even I don't own all 26 of the Oct. '18 funds, although I do own all of the 20 funds listed below. By way of explanation, I have been at this for more than 2 decades and once I find a fund I am satisfied with, I rarely close it out, thus leading to perhaps too many funds - yes, I admit it.)
Regards,
Ted
http://funds-newsletter.com/mar19-newsletter/mar19_new.htm

MikeM

Nice article. My own contention is fund collecting is detrimental to returns. I think Tom was trying to be kind in his comments.

A couple worth while comments:

So you can see how some investors' portfolios can grow quite large. Will these investors necessarily do better than an investor who only invests a small number of funds, or even just in the Vanguard LifeStrategy Moderate Growth Fund? There is no way to know in advance but I suppose it depends largely on how accurately each investor has judged in advance which fund categories and specific funds will do better than the performance of the total stock and bond markets. This is extremely hard for any investor, or even financial professional, to accomplish...

Bottom line: In the end, individual investors must decide for themselves the number of funds they want to invest in, as there is no "right" or "wrong" answer. Given that, it would worthwhile for investors choosing more than a handful of funds to periodically check to see whether their choices as a whole are doing better than the option of sticking to just a very small number of funds.

hank

It’s an interesting question. I don’t have the answer. But I find owning much more than a dozen funds becomes more than I can wrap my head around. I tend to think and allocate according to fund type. A dozen pretty much covers the categories I want. I’ve noticed that @Old_Skeet here goes a step further and breaks his funds down into the specific types of holdings within them (ie: investment grade debt, high yield debt, small cap domestic, large cap domestic, etc.). Since thst’s his game plan I wouldn’t criticize. Obviously it works for some investors,

I’ve never given much salt to the belief that owning a lot of funds damages returns. (Provided you understand what you own it should be “a wash”.) To me it just needlessly complicates things.

Low_Tech

I have 5 regular funds and 6 ETFs, and a very conservative AA at 35/65.

I am spread across the global equity market and the domestic bond market (no long term and no junk) with maybe 10% in foreign bonds. I could dump 3-4-5 of the funds and still be as diversified, and still maintain my AA.

But everything is working so I'll just leave it alone.

Old_Skeet

Hi guys: As @hank noted ... Here is how Old_Skeet rolls and manages a consolidated portfolio of 49 funds. My thinking is that if you can't manage what you have then you've got to many funds. Being a prior corporate credit manager for a regional distribution company I had to have a receivable system in place to manage a fairly large customer base. Thus, I developed my sleeve management system to help manage my family's investments. Through the years it has worked fairly well. You can read more about this below.

Sleeve Management System ... Last Revised on 03/01/2019

Now being in retirement here is a brief description of my sleeve management system which I organized to better manage the investments held within mine and my wife's portfolios. The consolidated master portfolio is comprised of two taxable investment accounts, two self directed retirement accounts, a health savings account plus two bank savings accounts. With this, I came up with four investment areas. They are a cash area which consist of two sleeves ... an investment cash sleeve and a demand cash sleeve. The next area is the income area which consist of two sleeves ... a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves ... a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. And, then there is the growth area where the most risk in the portfolio is found and it consist of five sleeves ... a global growth sleeve, a large/mid cap sleeve, a small/mid cap sleeve, a specialty/theme sleeve plus a special investment (spiff) sleeve. Each sleeve (in most cases) consist of three to twelve funds with the size and weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds held along with their amounts. By using the sleeve system I can get a better picture of my overall investment landscape. I have found it beneficial to Xray each fund, each sleeve, each investment area, and the portfolio as a whole quarterly for analysis. My positions and sleeves can be adjusted from time-to-time as to how I might be reading the markets through using my market barometer and equity weighting matrix system. The matrix system is driven by the barometer. All my funds with the exception of those in my health savings account pay their distributions to the cash area of the portfolio. This automatically builds cash in the cash area to meet the portfolio's disbursements (when necessary) with the residual being left for new investment opportunity. Generally, in any one year, I take no more than a sum equal to one half of my portfolio's five year average return. In this way principal builds over time. In addition, most buy/sell transactions settle from, or to, the cash area with some net asset exchanges between funds taking place. In addition, my rebalance threshold is + (or -) 2% from my target allocation for both my income, growth & income and growth areas while I generally let cash float.

Consolidated Master Portfolio

Here is how I have my asset allocation broken out in percent ranges, by area. My neutral allocation weightings follow. They are cash area 15%, income area 35%, growth & income area 35% and growth & other asset area 15%. I do an Instant Xray analysis of the portfolio quarterly and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc. I have the portfolio set up in Morningstar's portfolio manager by sleeve, by area and the portfolio as a whole for easy monitoring plus I use brokerage account statements, Morningstar fund reports, fund fact sheets along with their annual reports to follow my investments. I also maintain a list of positions to add (A) to, to buy (B), to reduce (R) or to sell (S). Generally, funds are assigned to a sleeve based upon a best fit basis.

Currently, my INVESTMENT FOCUS is to increase my portfolio's income stream through positioning new money into income generating assets while letting equities run on the high side to their upper threshold limit.

Target Asset Allocation (Balanced Towards Income): Cash 20%, Income 40%, G&I 30% & Growth 10%
Consolidated Master Portfolio Asset Allocation: Cash 16%, Income 39%, G&I 32% & Growth 13%
Rebalance Action Needed: Decrease Growth Area 1% and Increase Income Area 1%

CASH AREA: (Weighting Range 10% to 20%)
Demand Cash Sleeve ... Cash Distribution Accrual & Future Investment Accrual
Investment Cash Sleeve ... Money Market Funds: AMAXX, GBAXX, DTGXX, PCOXX, CD Ladder(A) &
Cash Savings(A)

INCOME AREA: (Weighting Range 30% to 40%)
Fixed Income Sleeve: CTFAX(A), GIFAX, LBNDX(A), NEFZX, PONAX(A) & TSIAX
Hybrid Income Sleeve: APIUX, AZNAX, BAICX, DIFAX(A), FISCX(A), FKINX, ISFAX(A), JNBAX, PGBAX & PMAIX

GROWTH & INCOME AREA: (Weighting Range 30% to 40%)
Global Equity Sleeve: CWGIX, DEQAX, DWGAX & EADIX(A)
Global Hybrid Sleeve: CAIBX, TEQIX & TIBAX
Domestic Equity Sleeve: ANCFX, FDSAX, INUTX(A) & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, FBLAX, FRINX(A), HWIAX & LABFX

GROWTH & OTHER ASSET AREA: (Weighting Range 10% to 20%)
Large/Mid Cap Sleeve: AGTHX, AMCPX & SPECX
Small/Mid Cap Sleeve: AOFAX, NDVAX & PMDAX
Global Growth Sleeve: ANWPX, NEWFX & SMCWX
Miscellaneous, Specialty & Theme Sleeve: LPEFX, PCLAX & PGUAX
Ballast & Spiff Sleeve: No position held at this time.

MikeM

This is an exercise in file management. Less to do with investing. A single TRP retirement fund would likely result in simliar returns (but that's probably same argument for what I do.) You enjoy doing it so that is what's important.

hank

“The consolidated master portfolio is comprised of two taxable investment accounts, two self directed retirement accounts, a health savings account plus two bank savings accounts.”

- That’s a lot of accounts. Since you view them as a “consolidated master portfolio”, what you share with the board about allocations pertains to the overall big picture I would assume. Provided you’re comfortable with your health savings account having the same market risk as your retirement accounts, etc. that looks workable.

- I suspect there may be limitations within some of those different accounts as to which funds you may own. That would tend to increase your total number of funds.

- Since these accounts comprise a consolidated portfolio, it would seem impossible to maintain each of those separate accounts with the same proportion of assets at all times. The only way to do that would be to sell / buy equal percentages for each of the different accounts every time your allocation changes.

- Bank accounts should not increase the number of funds held. With my insured bank or credit union accounts I simply combine them all together under one category as “cash”. While they affect the allocation, they don’t contribute to the number of funds owned.

Thanks for the response and additional insights Ol’Skeet.


My own portfolio: 4 converted Roths, 1 Traditional IRA, and non-sheltered cash holdings. For simplicity I treat the various accounts as one “ball of wax”. I might try to position the Roths a bit differently - but generally don’t bother to keep them separate for allocation purposes. In a couple instances I hold the same fund in both a Traditional and Roth.

Old_Skeet

Hi @MikeM:

Thanks for making comment.

It all boils down to managing risk. The type of fund you reference was not around back in the 80's when I began to invest family money via the sleeve system. With this, I've kept my system in place. And, yes I enjoy it. Plus, I beleive that it puts more coins in my pocket over a more simple strategy. And, agreed ... it is probally not suited for the average retail investor. However, in my system if a fund falters there are others within the sleeve that can continue to propel the sleeve. Thus it diversifies manager, strategy and fund risk and spreads it over many.

My high school buddy who by profession was a successful engineer today uses one bond fund and one equity fund and rebalances between a 40%/60% allocation based upon his read of the markets. At times, his performance leads mine and at time mine leads his. He has to sell securites to meet his withdrawal distribution needs while I do not as my portfolio generates the necessary income to meet distribution needs plus leaving some for future investment purposes. Both portfolio's are about the same size and distributions needs are about the same. His portfolio has a yield of about 2.1% while mine is about 3.2% plus both portfolios produce fund capital gain distributions which I take in cash and which he reinvest all fund distributions. I have suggested, to him, that he take all fund distributions in cash and stop the automatic reinvestment process since he is now in the distribution phase of investing.

It all boils down to what works best for each of us as being the best route for each one of us to travel.

I wish you continued "Good Investing" in the years to come.

Skeet

Ted

@MFO Members: I would love to count all of Old_Skeet's funds, but I don't have enough fingers and toes.
Regards,
Ted

hank

Here’s what Henry David Thoreau had to say:

“Simplicity, simplicity, simplicity! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb nail.”

While Thoreau never attained great wealth, his life and words will be remembered long after most of us are forgotten.

Old_Skeet

Hi @hank: While my sleeve system seems complex to some ... it is really quite easy to manage. Besides, if I started selling off mutual funds to reduce their numbber I've have a really large tax bill form realized capital gains from the sell proceeds. About 60% of my consolidated portfolio is in taxable accounts. Remember, one of my investment positions and largest (Franklin Income) goes back to my early teenage years; and, my second largest (Income Fund of America) goes back a good number of years as well.

My father's broker was a pretty wise person. I remember him telling me that these funds will give you exposure to both stocks and bonds. Plus, they generate good income. And, income never goes out of style.

hank

Old_Skeet said:

While my sleeve system seems complex to some ... it is really quite easy to manage.

This might be the first time ever that I’ve found myself in agreement with @Ted.

Old_Skeet

Hi @Ted & @hank: LOL, Hope you both have a great day. For me I'm planning on watching the NASCAR race this afternoon. And, yes I skipped going to church this morning. Skeet

MikeM

I have suggested, to him, that he take all fund distributions in cash and stop the automatic reinvestment process since he is now in the distribution phase of investing.

I think that is good advice to your friend @Old_Skeet. I'm not at distribution phase yet. At 65 I keep putting off retirement, but my intent when I get there is to do what you suggested and change my fund and stock distributions to go to cash instead of reinvesting. My plan is to have about a 3 year cash bucket to draw from and add those distributions to the bucket. That should stretch out the replenishment time past 3 years and assure I don't have to replenish in a bear market.

Thanks for the feedback. You do seem to handle multiple accounts and the complexity that goes with that pretty well. That takes discipline. I have to say, the older I get the simpler I want to make things. I like investing, but I came to the conclusion a few years ago my tweaks and typically late adjustments added little to no value.

Investor

I used to think that Target Date funds were not pretty good investments. But they have improved and costs have come down significantly. I think most investors will do just fine with a low cost target date fund. People have better things to do with their lives than watch their investments. We do it because it is our hobby in a way.

When I changed jobs (while being away from MFO), I have selected Target Date fund for my 401k investments at the new company. Initially I was thinking well I have no monies in the new account, when it grows up sufficiently I will do allocation myself, besides I am too busy with new job and a few other personal things in my life. I think it is a decent investment for most people and I would even claim that "most people" probably includes many of us here.

Do you want a bit more diversification than target date funds add a bit more small cap 5% and small cap international 5% (or 10% global small cap). Step up the target date fund to next higher bond allocation to sooth the extra volatility due to small cap and you are pretty good to go.

msf

I agree with you that a core holding having an appropriate glide path plus a little bit of tweaking around the edges can serve as a good plan for many people.

The question is: what's an appropriate glide path?

See, e.g. Pfau's and Kitces' paper suggesting that one's equity allocation should gradually increase through retirement. Not that most people have the stomach for that.

https://www.onefpa.org/journal/Pages/Reducing Retirement Risk with a Rising Equity Glide Path.aspx

https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

Sven

I too have made sizable changes in recent years. More than half are broad based Index funds and ETFs while the rest are actively managed funds and individual stocks. These days there are much other things to do with kids in college and gardening. My kid's 529 plans are still on target date funds and they work out great today.

Investor

msf said:

The question is: what's an appropriate glide path?

I will argue that most decreasing glidepaths do a pretty good job. The end result over time tends to be similar.

I am not sure of the increasing equity allocation in retirement though. I have to study it more. If the market turns south early in the path the recovery is easier with the help of newer contributions plus the person has an option to delay the retirement and adjust to the realities. If that happens after your retirement the impact will be much higher.

Now, I can think of a scenario that you have accumulated sufficient sums for retirement and covered potential risks that you may face in retirement and you have a significant excess in retirement funds. Well, I can consider that part defectively separate from retirement and invest for legacy or for charitable purposes. If the investment works for that portion good. If not well, you don't have to worry, you have already safeguarded yourself. I am sure there exists people in this situation. I don't see myself having too much excess funds for retirement. That is a really good problem to have.

An alternative to glide path is a lifetime fixed allocation say 60/40 like pensions used to invest. That is also a simple and reasonable strategy.

What I am trying to say that many uncomplicated and reasonable strategies will work if given sufficient time for accumulation and growth. The problem is that contributions are too small and starting too late in life. That makes accumulation of funds for retirement difficult. The investor is driven to taking more risk than they would otherwise need because of the lack of time and if they happen to hit a period with markets doing their prolonged nosedive they risk not having enough in retirement. It becomes a gamble rather than long term investing.

MikeM

@MFO Members: I would love to count all of Old_Skeet's funds, but I don't have enough fingers and toes.

@Ted, I believe you just came up with the perfect 'rule-of-thumb' for how many is too many!

Tarwheel

Those who criticize others for having too many funds ignore a common reality. Many investors have different accounts with different funds available to invest in, making it virtually impossible to simplify beyond a certain point. My wife and I both have separate 401Ks, a necessity, which do not have balanced or target funds as options. We both have separate Rollover and Roth IRAs, as well as a joint investment account. That means that we have 7 different accounts with a range of investment options. We have simplified to a degree, but I’m not willing to roll over our 401Ks to our IRAs because the 401Ks have advantages such as stable value funds, automatic rebalancing and very low cost index funds.

msf

Investor said:

What I am trying to say that many uncomplicated and reasonable strategies will work if given sufficient time for accumulation and growth.

I believe that you and Pfau/Kitces are addressing two different halves of one's investing lifetime. My fault - you had been talking about your investing up to retirement and I tossed in a study of glide paths after retiring.

Put the two halves together and what you wind up with is a U shaped curve for equity exposure - high when young, declining (probably further than the traditional glide path) to retirement, and then rising.

I introduced this for the purpose of illustrating that glide paths (even during accumulation) could do with a bit of scrutiny. For example, as I hinted at above, one might be better off shooting for a lower equity allocation at the target (retirement) date.

They're addressing sequence of return risk in retirement. Since that's an early retirement risk, they find that starting with a low equity allocation deals with that risk, and increasing equity over time compensates for the lower starting point. At least that's what I got from skimming - it's been awhile since I originally read the full writeup.

No question - uncomplicated is good. My portfolio (like almost everyone's, I suspect) falls somewhere between Skeet's three dimensional portfolio and a couch potato portfolio. I'm gradually pruning. This could take many years though. Think half-life - the more the portfolio "decays" (is pruned), the slower the pruning gets.

Investor

@msf Yes, I was primarily talking about the first half. Sorry for the confusion. I am still in the accumulation phase so my focus was in using these funds for accumulation.