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In the past I've read if you own stocks you need anywhere between 20 -30 stocks to be diversified. My question is since when we are talking stocks why is that so many individuals own 20 and 30 funds equity funds?
Not everyone owns those many. Many hold less than 10 and many own more than that due to multiple accounts they hold (401k, rolloever IRAs, Roth IRAs, etc). Multiply it by 2 for people who are married, as their spouses too potentially hold that many accounts.
There is another set of folks, who own most of their funds in a few core funds, and experiment (tactical allocation, momentum and what not) with some 10-20% of their investment funds.
As noted previous; and applied for our house having 8 different retirement accts; with 401k's, 403b's and our IRA's (trad. and Roth). One grabs what is available with some of these accts' and many plans are not all that great for fund choices. If a working couple wants exposure in large cap funds across the entire balance of all accts.; 8 different funds may be needed just for this. Regards, Catch
On todays internet with free portfolio managers everywhere, it is easier to manage multiple funds than before. Twenty years ago, we would get in the mail a bunch of quarterly reports and such which made it harder to manage. It also depends on the amount of money one has to invest.
Reply to @Charles: Charles, bud. No. You cannot be diversified using THOSE 4 stocks. IF you think you can do that you need to buy companies that have us by our ***** and who can squeeze any time they want to make you yelp in pain. They would all be the most disgusting companies I will not name here. None of the 4 companies you listed are required for our way of life. For instance, all iPads dissappearing from the face of the earth will not end life as we know it.
"In the past I've read if you own stocks you need anywhere between 20 -30 stocks to be diversified. My question is since when we are talking stocks why is that so many individuals own 20 and 30 funds equity funds?"
Not here, at my house. I have a combination of taxable and retirement accounts, and my total is just 9. My wife just lately was informed that she now qualifies for her retirement plan at her job, and that account consists of just a single mutual fund from off of their less than ideal list of options. (Vanguard small-companies Index fund.) So, we have TEN funds, total.
Just make sure you have domestic and foreign covered. If you're younger, you won't need to invest much in bonds at all, mostly all equities will be better, until you get into your 40s or so. Choose your funds wisely. Listen and pay attention to the others in here, who know way more than myself. At least by now, I'm not a babe in the woods any longer. I've learned a lot in here, at Mutual Fund Observer.
Dear golub1: Why do they own 20 or 30 equity funds ? They don't know anything about investing, and want to make fund companies rich. Having to own 8 different funds for large-cap exposure is total nonsense. You can have adequate exposure to large-caps for two accounts by owning SPY in each account. Morningstar found that single-fund portfolios had the highest standard deviation, delivering either the biggest gains or the heaviest losses. So owning just one fund can be a risky bet. Add a fund and the standard deviation drops significantly. Returns are lower, but the downside is less severe, too.
After seven funds, however, a portfolio's standard deviation stays pretty much the same regardless of how many funds you add. In other words, once you own seven funds, there may be no need for more. I own just six funds, SPY, IHJ, PFF, PBDCX, PONCX, PRHSX
You noted: Why do they own 20 or 30 equity funds ? They don't know anything about investing, and want to make fund companies rich. Having to own 8 different funds for large-cap exposure is total nonsense. You can have adequate exposure to large-caps for two accounts by owning SPY in each account." Apparently your reading comprehension is stuck, or you lack an understanding of fund/index offerings available in 401k and 403b plans today. Four of our plans have four different fund vendors, with none of them having a brokerage feature (meaning no access to an etf or similar) and no access to funds other than those offered. An equivalent to SPY may be had, via a fund or in some cases an index; but we must take the vendor fund that is offered. So, if we want large cap exposure for each account, we will have four different large cap funds or indexes. Tis that simple, Ted. No other explanation is necessary. Do you now understand?
Reply to @catch22: There is nothing wrong with my reading comprehension, what's wrong is your lack of investment skills. If SPY isn't available then, the buy one of the many S&P 500 Index Funds they surely must offer. You don't need large cap exposure for each account.
Reply to @Ted: Hate to say it, , but I think Ted is on the money with his information.
Catch22, I'm sure you have thought about this, I think you said you were retired, but why wouldn't you make your retirement portfolio more concise by combining these different accounts to a single (or 2) IRA's.
I kind of think multiple fund portfolios happen because 1, reading about new funds and buying hot funds is addictive, and 2, it may be intuitive but not necessarily correct as Ted pointed out, to think more funds give better diversification and a smoother ride. A 3rd reason for the many fund portfolio may be the lack of trust in the managers they employ, not wanting to put a high percentage in one funds hands.
Anyway, not trying to offend the 20, 30, 40 or more fund investors. Just giving my 2-cents. Come to think of it, my 2-cents's have probably added up to about a buck by now.
I don't disagree with Ted and others who have noted here; that one does not necessary need many funds to cover a broad area of investment sectors.
If you find yourself forced or by choice, to work for 4 different companies during your working career; and you have a 401k, etc.; you will likely have the option to rollover the 401k from the previous employer or opt to keep the plan. Eventually, you may have 4 different retirement plans; and you will likely discover that many company plans are not all that good for choices. Thus, if you choose to have exposure to a particular fund sector in all of the plans, you too may have 4 different fund vendors for exposure to a sector.
Obviously, one may have a fairly broad spread across many sectors; if the proper funds or indexes are available. This circumstance would generally not be a problem with an IRA account; but can be a problem with company plans. At the least, one could choose a large, mid and small cap U.S. blend to cover this area. Perhaps a broad based internation and whatever other sector suits your fancy.
We have one plan that has a large cap and small cap index available, but no mid-cap. But, with the overlap of the large cap into the mid-cap area and the overlap of the small cap into the mid-cap area; most of the overall broad range of U.S. cap sizes are satisfied. One takes what they can get.
Hoping that you have access to one of the rare, well thought company retirement plans.
Reply to @Ted: I already stated that SPY equivalents are available and used. And why wouldn't we want our chosen balance to each account? We don't want one account too heavy towards bonds and another too heavy against equity. We attempt to blend each account for an overall balance to all of the total monies invested. I recall you (I do believe) recently linked an article that talked about this circumstance of balancing across all accounts. I agree with the suggestion and is what we have used for many years. If one wants a 50/50, equity/bond portfolio; then it should be used in all accounts.
Reply to @Ted: I'm not trying to convince catch, Just asking the question. I do believe the most important part about investing is playing with-in your comfort zone.
Reply to @catch22: You should have rolled over your 401(k) each time you left an employer. Working for a number companies in your lifetime, is very common, and most workers use the rollover method to simplify their retirement portfolios. Granted not all 401(k) plans have very good fund options, but you should in the best they have to offer. You need to enroll in investing 101 !
You are correct; and Ted is correct for his circumstance. My reply to Ted and golbu1 is that through one's working career and employee retirement accounts; circumstances with which we have no control cause different requirements for investing choices (funds). You and I both know the days of having the same employer for 30 or more years are likely gone. This was not the case for this house over 35 years; and we have encountered 5 vendor changes for our employer plans over those years.
Have you had vendor changes and/or more than one employer account?
Yes, the "other" accounts will be rolled by the end of this year. I am tired of dealing with so many vendor accounts. The "Funds Boat" write was about our retirement accounts; not being retired. That status is now changed for this year, 2013.
We don't hot swap fund holdings. I will guess that our average fund rotations may have averaged about 5/year over the past 10 years. We don't chase funds for whatever reason, without consideration and/or study.
Simple passive indexes available via Fido will allow for fewer funds. Hell, if one chose 6-9 indexes or etf's; we could cover pretty much the whole sector spectrum.
As an aside, I sure don't know why Ted has such a grind against me. I have asked in the past, but never had a reply. I am pleased everyone who is here at MFO and posts their thoughts, are indeed here. My reply to Ted was to help him and anyone else, understand circumstances that may evolve over a working career with employer retirement accounts. He has treated this as we being dumb arses at this house. We have only been working with what was available to us, and have a 7.24% annualized return beginning from 1979. Don't know what else we could have done to improve the numbers.
Well, anyway; take care and thank you for your thoughts here. Catch
You noted: "Granted not all 401(k) plans have very good fund options, but you should in the best they have to offer."
You answered your own question. I will state again, as you noted; "Granted not all 401(k) plans have very good fund options.
Many folks have to make this choice. Thus, some acquire more than one 401k, etc.; as the new employer retirement plan is lacking. If I had a brokerage available 401k at a previous employer, I surely would not throw that away and roll into a new plan that had limited choices and no brokerage feature.
You also noted: " but you should in the best they have to offer. You need to enroll in investing 101 ! "
Not sure what this means, aside from a presumption for some unknown reason.
I have been following this post and at first I thought I’d remain silent … but, I just had to chime in because I feel the answer is that it depends on the individual investor.
I think the correct number of funds one should hold should be determined by the individual investor themselves. While the right number for one might not be the right number for another. One of my good friends chooses to run with just a few and he is primarily an indexer. His three main assets classes are stocks, bonds and cash. He only uses an S&P 500 Index fund for his equity representations and an indexed bond fund for his fixed income representations. He tweaks his asset allocation as how much of each to hold from time-to-time subject to how he is reading the market(s). He did not even wish to add a mid or small cap index fund to additionally diversify his equities nor did he wish to add any foreign or emerging market positions. “I am keeping it simple,” he said so I can play a good deal of golf, cards and fish. Well it works for him and he generates respectable returns. I tipped him on CTFAX, Columbia Thermostat Fund, that adjust its stock and bond allocations based upon the price valuation of the S&P 500 Index. I have linked the fund’s fact sheet for those that might be interested. To achieve its diversification goals it currently holds ten funds. https://www.columbiamanagement.com/content/columbia/pdf/LIT_DOC_3C97987F.PDF
Now for me, I currently hold 48 funds which are divided among ten sleeves with each sleeve holding between three to six funds plus two sleeves in the cash area, one for demand cash and one for investment cash “time deposits.” In the income area there are two sleeves (fixed income and hybrid income) which holds six funds each, in the growth and income area of the portfolio there are four sleeves (equity global, equity domestic, global hybrid and domestic hybrid) holding a total of eighteen funds ranging form three to six funds each. In the growth area of the portfolio there are four sleeves (global, domestic large/mid, domestic small/mid and specialty) holding a total of eighteen funds with each sleeve holding four to six funds. My thinking is that if one of the funds held within their sleeve falters then there are the other funds that can offer support thus keeping the sleeve productive.
My system works for me and my friends system works for him. On the question … How many funds one should hold? Again, my thinking is that it depends on the individual investor as to what they feel is right for them.
Reply to @catch22: I hear every word, man. And I don't know why uncle Ted wants to talk down to you. It is new info. for me, to learn that diversifying beyond 7 funds may bring no tangible benefit. There's a reason not to add any more funds to what I already own. I had a 403b with Royce. When I wanted to close it out and transfer the money in there to a different fund family, Royce made it deliberately difficult and time consuming. Some people might be discouraged and give up. It just enrages me. So I made SURE to move my money out of Royce, because they were being such jerks. ...So, yes: moving portfolio money from here to there and consolidating in a way that makes sense is not always possible, given job circumstances and everything else. My fund lineup would look different if my 403b choices were any better. Mine was, in fact, entirely self-directed, but fewer and fewer fund houses want to deal with 403b anymore....
Good to hear from you. How's that retirement gig going?
I really did not expect Ted to answer my question. Lately Ted has been, for lack of a better word, stubborn, that his way is the only way.
I described a real life situation, mine. I watch over 52 funds in 7 account for family members. I also help co-workers with their allocations. I spend only a few hours a week looking over things and keeping a watch list to upgrade funds if needed.
I am still following the "Market Leadership Strategy" with a small amount as an experiment. So far so good.
As I like to say "If its not broke, don't fix it".
You are perfectly correct in stating that today’s conventional wisdom recommends that 20 to 30 stock positions provide sufficient diversification for the equity portion of a portfolio. Note that conclusion is strictly limited to equity holdings for the US marketplace. In essence, it evolves from the diversification requirement to touch all 10 major investment industries with 2 to 3 core holdings in each to reduce individual entity risk.
A much expanded base is needed to adequately diversify worldwide equities, and fixed income products would further expand the total portfolio.
That’s a huge screening, choosing, and monitoring work load. Not many of us have the time, the patience, or the resources to sort through this likely mess. That’s precisely why mutual funds/ETFs make such sense.
But why 20 to 30 mutual fund holdings?
The popularity and disparity of the replies testifies to the complex nature of individual circumstances, preferences, and biases. I trust that each individual responder truly believes he has made the proper choices given his specific set of circumstances and constraints.
MFO participants are well versed and experienced in financial and investment matters. I would never doubt their thoughtful decisions. But expert knowledge and forecasting are imperfect, especially in the marketplace.
So I listen and learn from this wide expert opinion base, but I always reserve the prerogative to interpret it for my own special purposes. After the infamous Bay of Pigs fiasco, John F. Kennedy remarked: “How could I have been so mistaken as to have trusted the experts”.
In the investment universe, the expert advice and forecasting record from the professional cohort is little better than what an informed amateur can provide. With that cautionary warning, I offer my dollars worth (reflects inflation).
My simple answer is that 20 to 30 fund positions is an unnecessary extravagance in most instances. Rare exceptions do exist. At no time are over 30 funds mandatory, especially for full diversification.
The MFO mob has covered many bases with earlier considerate replies. I agree with most; I disagree with a few. I’ll focus attention on three dimensions, two of which have been partially addressed. The three dimensions are: diversification, wealth, and geography. Yes, geography.
Using only fund products, adequate diversification for an equity/fixed income mixed portfolio can be reasonably secured with 3 fund positions: a US total equity Index fund, a total International Index fund, and a total bond Index fund. The percentages in each category mostly should depend on age and risk tolerance profile. This 3 fund portfolio usually provides about 90 % of all anticipated diversification benefits.
If the portfolio is large enough (the wealth aspects of the problem discussed earlier by John Chisum), the additional 10 % diversification free lunch can be captured by adding REITs, precious metals, small cap, value oriented, and emerging market units to the basic portfolio. These additional 5 elements closely maximize any diversity benefits easily achievable.
The portfolio has now expanded to 8 holdings. Note how this number is very representative of the positions frequently recommended in Lazy-Man portfolio constructions. The Lazy-Man portfolios have proven their mettle and resiliency over long timeframes. An investor could experience, and most do, far poorer performance than that delivered by these accessible standard-bearers.
Now allow me to introduce geography into the discussion. I have long believed that folks on the East coast differ in many ways from those on the West coast and everywhere between the two bookends. Those disparities also penetrate investment perspectives, preferences, and attitudes.
What is true for the general population is equally true for financial and investment professionals alike. Harvard trained economists are not the same as Chicago trained economists are not the same as Stanford graduates. That geographic induced phenomena persists in the investment community. Just visit Fidelity and Dodge and Cox to feel it. I did. It is real.
Even If you somewhat disagree with my geography readings, you might consider doubling down in each of the 8 fund categories already identified to gain some novel or inspired thinking and philosophy benefits. The total number of funds in a portfolio has now escaladed to 16. That’s my top number.
Of course, the 16 individual units are only required if you pursue an active fund investment program. A passive philosophy reverts the total number to the basic 8 holdings.
One closing comment is offered to those investors who hold both funds and individual stocks in their portfolios. You might be inclined to juice annual returns with a few carefully selected stocks. Nothing wrong with that goal, but the behavioral researchers conclude that your odds are bad because of overconfidence, anchoring effects, recentcy bias and a host of other behavioral characteristics that work against you. There were reasons why you abandoned individual holdings.
My thumbs-down to that approach is that you now expose yourself to the same heavy work load that likely prompted you to go the mutual fund/ETF route in the first place. For me, the tradeoffs are not attractive enough and the risk factor is nudged higher.
I hope this helps.
I often am a day late, but I am never a word short.
Sorry for the delay in responding. I somehow must have missed it.
Form retirement, I have not yet got to slow down. My old firm keeps calling me back to the office from time-to-time to sort things out and meet with preferred clients. Seems nobody felt I did much but collect my time and money form being around the place. Then, when it was left up to others to do what Skeeter did ... Well, they are now seeing it was not so simple. After all, I grew with the position through the years, knew the people and knew how to handle issues to meet the customer's satisfaction. My boss is still there and she simple told them to do what Skeeter use to do ... after all ... it worked for him for many years. She was good at letting me go and do pretty much what I wanted to do and allowed me to take much of the summer off while she took much of the fall off. We could cover and work one anothers desk. Now she seems to have the mind set to let them learn on their own, much like she and I did. This is a small family run business and I handled much of the back office and she handled the front office and we could switch off while the others reported to us.
I have started billing them for my time when they call because the cusomers ask for me and if I have to come in to the office the rate is subject to what I find must be done. Somebody is going to screw something up real soon and real good ... and, I don't want to be around when they do. I don't think my boss does either and if she did not own the place she'd probally be out of there ... trying to kick back like I am doing. By the way I will get income trails for the next three years form the firm plus time that I might bill for my time. Told her she had to stay until my trails were paid.
So Art, That's how it is going. And, oh yes ... I play golf on Thursday afternoons and then drive to the coast for the weekend and then back to Charlotte on Sunday evenings. The wife still works in the local school system as a 52 week employee ... but, she works Monday thru Thursday through the summer months plus taking vacation. She will retire out of the system in about two years. We plan to gift the Charlotte homestead to our son when we move to the coast as it was gifted to us by my parents plus we have our own home too. In this way, we should be well pass the look back should we fall in poor health in the years to come and run out of money. I don't think so ... but, one really never knows.
I am still trying to find the time to start a restoration project on my 1992 Jeep Cheorkee that I have had for many years. I went and looked at a new one but just value my capital too much to let go of it. The Jeep needs a rear main seal, a set of new tires and just gone over in general but overall all I'd start out to the west coast in it on most any day. It is needed to put the boat in and out of the water at the coast and trail it back and forth during the off season rather than paying high slip and storage fees in the inlet. I have ramp acces through my HOA but not long term dock and storage.
I am not going there with Catch22 & Ted. There seems to be something of an issue ... hopefully, it will get worked out. They both are contributors and I would hate to see either leave. But, I do not enjoy the ongoing feud either.
I could go on ... but, I'd get in a rant. And, I just don't want to do that. Not now anyway.
Comments
There is another set of folks, who own most of their funds in a few core funds, and experiment (tactical allocation, momentum and what not) with some 10-20% of their investment funds.
Regards,
Catch
I think you can be diversified with just 4 stocks: eg., BAC, WLP, HES, AAPL.
I think you can be diversified with just 1 fund: eg., SEQUX. Or, FPACX. Or, VWINX.
OK, here is long-term 3 fund portfolio example: DODGX, SIGIX, VGENX.
That's it.
I think fewer is better, whether it is stocks or funds.
Think different 4.
Not here, at my house. I have a combination of taxable and retirement accounts, and my total is just 9. My wife just lately was informed that she now qualifies for her retirement plan at her job, and that account consists of just a single mutual fund from off of their less than ideal list of options. (Vanguard small-companies Index fund.) So, we have TEN funds, total.
Just make sure you have domestic and foreign covered. If you're younger, you won't need to invest much in bonds at all, mostly all equities will be better, until you get into your 40s or so. Choose your funds wisely. Listen and pay attention to the others in here, who know way more than myself. At least by now, I'm not a babe in the woods any longer. I've learned a lot in here, at Mutual Fund Observer.
Morningstar found that single-fund portfolios had the highest standard deviation, delivering either the biggest gains or the heaviest losses. So owning just one fund can be a risky bet. Add a fund and the standard deviation drops significantly. Returns are lower, but the downside is less severe, too.
After seven funds, however, a portfolio's standard deviation stays pretty much the same regardless of how many funds you add. In other words, once you own seven funds, there may be no need for more.
I own just six funds, SPY, IHJ, PFF, PBDCX, PONCX, PRHSX
You noted: Why do they own 20 or 30 equity funds ? They don't know anything about investing, and want to make fund companies rich. Having to own 8 different funds for large-cap exposure is total nonsense. You can have adequate exposure to large-caps for two accounts by owning SPY in each account."
Apparently your reading comprehension is stuck, or you lack an understanding of fund/index offerings available in 401k and 403b plans today. Four of our plans have four different fund vendors, with none of them having a brokerage feature (meaning no access to an etf or similar) and no access to funds other than those offered. An equivalent to SPY may be had, via a fund or in some cases an index; but we must take the vendor fund that is offered. So, if we want large cap exposure for each account, we will have four different large cap funds or indexes.
Tis that simple, Ted. No other explanation is necessary. Do you now understand?
Catch22, I'm sure you have thought about this, I think you said you were retired, but why wouldn't you make your retirement portfolio more concise by combining these different accounts to a single (or 2) IRA's.
I kind of think multiple fund portfolios happen because 1, reading about new funds and buying hot funds is addictive, and 2, it may be intuitive but not necessarily correct as Ted pointed out, to think more funds give better diversification and a smoother ride. A 3rd reason for the many fund portfolio may be the lack of trust in the managers they employ, not wanting to put a high percentage in one funds hands.
Anyway, not trying to offend the 20, 30, 40 or more fund investors. Just giving my 2-cents. Come to think of it, my 2-cents's have probably added up to about a buck by now.
You noted: " My question is since when we are talking stocks why is that so many individuals own 20 and 30 equity funds?"
I don't recall anyone here at MFO stating they owned 20-30 equity funds. Perhaps someone may have 20-30 funds of mixed allocations.
Read this to have a better understanding of what exists for some investors having multiple retirement accounts: http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/comment/26674#Comment_26674
I don't disagree with Ted and others who have noted here; that one does not necessary need many funds to cover a broad area of investment sectors.
If you find yourself forced or by choice, to work for 4 different companies during your working career; and you have a 401k, etc.; you will likely have the option to rollover the 401k from the previous employer or opt to keep the plan. Eventually, you may have 4 different retirement plans; and you will likely discover that many company plans are not all that good for choices. Thus, if you choose to have exposure to a particular fund sector in all of the plans, you too may have 4 different fund vendors for exposure to a sector.
Obviously, one may have a fairly broad spread across many sectors; if the proper funds or indexes are available. This circumstance would generally not be a problem with an IRA account; but can be a problem with company plans. At the least, one could choose a large, mid and small cap U.S. blend to cover this area. Perhaps a broad based internation and whatever other sector suits your fancy.
We have one plan that has a large cap and small cap index available, but no mid-cap. But, with the overlap of the large cap into the mid-cap area and the overlap of the small cap into the mid-cap area; most of the overall broad range of U.S. cap sizes are satisfied. One takes what they can get.
Hoping that you have access to one of the rare, well thought company retirement plans.
Regards,
Catch
Regards,
Ted
I already stated that SPY equivalents are available and used. And why wouldn't we want our chosen balance to each account? We don't want one account too heavy towards bonds and another too heavy against equity. We attempt to blend each account for an overall balance to all of the total monies invested.
I recall you (I do believe) recently linked an article that talked about this circumstance of balancing across all accounts. I agree with the suggestion and is what we have used for many years.
If one wants a 50/50, equity/bond portfolio; then it should be used in all accounts.
Ted
Assume your way is the best way. What would you do in this scenario?
Husband and wife are both working and under 55 years of age. Rollovers took place when changing jobs and landed at Fidelity.
Both have workplace 401's.
Both have Roth's and IRA'S at Fidelity.
Wife's parents died so there is an inherited IRA in the mix
That is 5 accounts so now what?
Art
You are correct; and Ted is correct for his circumstance. My reply to Ted and golbu1 is that through one's working career and employee retirement accounts; circumstances with which we have no control cause different requirements for investing choices (funds). You and I both know the days of having the same employer for 30 or more years are likely gone. This was not the case for this house over 35 years; and we have encountered 5 vendor changes for our employer plans over those years.
Have you had vendor changes and/or more than one employer account?
Yes, the "other" accounts will be rolled by the end of this year. I am tired of dealing with so many vendor accounts. The "Funds Boat" write was about our retirement accounts; not being retired. That status is now changed for this year, 2013.
We don't hot swap fund holdings. I will guess that our average fund rotations may have averaged about 5/year over the past 10 years. We don't chase funds for whatever reason, without consideration and/or study.
Simple passive indexes available via Fido will allow for fewer funds. Hell, if one chose 6-9 indexes or etf's; we could cover pretty much the whole sector spectrum.
As an aside, I sure don't know why Ted has such a grind against me. I have asked in the past, but never had a reply. I am pleased everyone who is here at MFO and posts their thoughts, are indeed here. My reply to Ted was to help him and anyone else, understand circumstances that may evolve over a working career with employer retirement accounts. He has treated this as we being dumb arses at this house. We have only been working with what was available to us, and have a 7.24% annualized return beginning from 1979. Don't know what else we could have done to improve the numbers.
Well, anyway; take care and thank you for your thoughts here.
Catch
Okay, Ted; I'll ask again. Why the attacks. Folks here at MFO should know where this is coming from. Have I ever been negative or nasty to you?
I just don't understand.
Regards,
Catch
You noted: "Granted not all 401(k) plans have very good fund options, but you should in the best they have to offer."
You answered your own question. I will state again, as you noted; "Granted not all 401(k) plans have very good fund options.
Many folks have to make this choice. Thus, some acquire more than one 401k, etc.; as the new employer retirement plan is lacking. If I had a brokerage available 401k at a previous employer, I surely would not throw that away and roll into a new plan that had limited choices and no brokerage feature.
You also noted: " but you should in the best they have to offer. You need to enroll in investing 101 ! "
Not sure what this means, aside from a presumption for some unknown reason.
Regards,
Catch
I think the correct number of funds one should hold should be determined by the individual investor themselves. While the right number for one might not be the right number for another. One of my good friends chooses to run with just a few and he is primarily an indexer. His three main assets classes are stocks, bonds and cash. He only uses an S&P 500 Index fund for his equity representations and an indexed bond fund for his fixed income representations. He tweaks his asset allocation as how much of each to hold from time-to-time subject to how he is reading the market(s). He did not even wish to add a mid or small cap index fund to additionally diversify his equities nor did he wish to add any foreign or emerging market positions. “I am keeping it simple,” he said so I can play a good deal of golf, cards and fish. Well it works for him and he generates respectable returns. I tipped him on CTFAX, Columbia Thermostat Fund, that adjust its stock and bond allocations based upon the price valuation of the S&P 500 Index. I have linked the fund’s fact sheet for those that might be interested. To achieve its diversification goals it currently holds ten funds. https://www.columbiamanagement.com/content/columbia/pdf/LIT_DOC_3C97987F.PDF
Now for me, I currently hold 48 funds which are divided among ten sleeves with each sleeve holding between three to six funds plus two sleeves in the cash area, one for demand cash and one for investment cash “time deposits.” In the income area there are two sleeves (fixed income and hybrid income) which holds six funds each, in the growth and income area of the portfolio there are four sleeves (equity global, equity domestic, global hybrid and domestic hybrid) holding a total of eighteen funds ranging form three to six funds each. In the growth area of the portfolio there are four sleeves (global, domestic large/mid, domestic small/mid and specialty) holding a total of eighteen funds with each sleeve holding four to six funds. My thinking is that if one of the funds held within their sleeve falters then there are the other funds that can offer support thus keeping the sleeve productive.
My system works for me and my friends system works for him. On the question … How many funds one should hold? Again, my thinking is that it depends on the individual investor as to what they feel is right for them.
I wish all … “Good Investing.”
Skeeter
...So, yes: moving portfolio money from here to there and consolidating in a way that makes sense is not always possible, given job circumstances and everything else. My fund lineup would look different if my 403b choices were any better. Mine was, in fact, entirely self-directed, but fewer and fewer fund houses want to deal with 403b anymore....
Skeeter,
Good to hear from you. How's that retirement gig going?
I really did not expect Ted to answer my question. Lately Ted has been, for lack of a better word, stubborn, that his way is the only way.
I described a real life situation, mine. I watch over 52 funds in 7 account for family members. I also help co-workers with their allocations. I spend only a few hours a week looking over things and keeping a watch list to upgrade funds if needed.
I am still following the "Market Leadership Strategy" with a small amount as an experiment. So far so good.
As I like to say "If its not broke, don't fix it".
Art
You are perfectly correct in stating that today’s conventional wisdom recommends that 20 to 30 stock positions provide sufficient diversification for the equity portion of a portfolio. Note that conclusion is strictly limited to equity holdings for the US marketplace. In essence, it evolves from the diversification requirement to touch all 10 major investment industries with 2 to 3 core holdings in each to reduce individual entity risk.
A much expanded base is needed to adequately diversify worldwide equities, and fixed income products would further expand the total portfolio.
That’s a huge screening, choosing, and monitoring work load. Not many of us have the time, the patience, or the resources to sort through this likely mess. That’s precisely why mutual funds/ETFs make such sense.
But why 20 to 30 mutual fund holdings?
The popularity and disparity of the replies testifies to the complex nature of individual circumstances, preferences, and biases. I trust that each individual responder truly believes he has made the proper choices given his specific set of circumstances and constraints.
MFO participants are well versed and experienced in financial and investment matters. I would never doubt their thoughtful decisions. But expert knowledge and forecasting are imperfect, especially in the marketplace.
So I listen and learn from this wide expert opinion base, but I always reserve the prerogative to interpret it for my own special purposes. After the infamous Bay of Pigs fiasco, John F. Kennedy remarked: “How could I have been so mistaken as to have trusted the experts”.
In the investment universe, the expert advice and forecasting record from the professional cohort is little better than what an informed amateur can provide. With that cautionary warning, I offer my dollars worth (reflects inflation).
My simple answer is that 20 to 30 fund positions is an unnecessary extravagance in most instances. Rare exceptions do exist. At no time are over 30 funds mandatory, especially for full diversification.
The MFO mob has covered many bases with earlier considerate replies. I agree with most; I disagree with a few. I’ll focus attention on three dimensions, two of which have been partially addressed. The three dimensions are: diversification, wealth, and geography. Yes, geography.
Using only fund products, adequate diversification for an equity/fixed income mixed portfolio can be reasonably secured with 3 fund positions: a US total equity Index fund, a total International Index fund, and a total bond Index fund. The percentages in each category mostly should depend on age and risk tolerance profile. This 3 fund portfolio usually provides about 90 % of all anticipated diversification benefits.
If the portfolio is large enough (the wealth aspects of the problem discussed earlier by John Chisum), the additional 10 % diversification free lunch can be captured by adding REITs, precious metals, small cap, value oriented, and emerging market units to the basic portfolio. These additional 5 elements closely maximize any diversity benefits easily achievable.
The portfolio has now expanded to 8 holdings. Note how this number is very representative of the positions frequently recommended in Lazy-Man portfolio constructions. The Lazy-Man portfolios have proven their mettle and resiliency over long timeframes. An investor could experience, and most do, far poorer performance than that delivered by these accessible standard-bearers.
Now allow me to introduce geography into the discussion. I have long believed that folks on the East coast differ in many ways from those on the West coast and everywhere between the two bookends. Those disparities also penetrate investment perspectives, preferences, and attitudes.
What is true for the general population is equally true for financial and investment professionals alike. Harvard trained economists are not the same as Chicago trained economists are not the same as Stanford graduates. That geographic induced phenomena persists in the investment community. Just visit Fidelity and Dodge and Cox to feel it. I did. It is real.
Even If you somewhat disagree with my geography readings, you might consider doubling down in each of the 8 fund categories already identified to gain some novel or inspired thinking and philosophy benefits. The total number of funds in a portfolio has now escaladed to 16. That’s my top number.
Of course, the 16 individual units are only required if you pursue an active fund investment program. A passive philosophy reverts the total number to the basic 8 holdings.
One closing comment is offered to those investors who hold both funds and individual stocks in their portfolios. You might be inclined to juice annual returns with a few carefully selected stocks. Nothing wrong with that goal, but the behavioral researchers conclude that your odds are bad because of overconfidence, anchoring effects, recentcy bias and a host of other behavioral characteristics that work against you. There were reasons why you abandoned individual holdings.
My thumbs-down to that approach is that you now expose yourself to the same heavy work load that likely prompted you to go the mutual fund/ETF route in the first place. For me, the tradeoffs are not attractive enough and the risk factor is nudged higher.
I hope this helps.
I often am a day late, but I am never a word short.
Best Wishes.
Hi Art,
Sorry for the delay in responding. I somehow must have missed it.
Form retirement, I have not yet got to slow down. My old firm keeps calling me back to the office from time-to-time to sort things out and meet with preferred clients. Seems nobody felt I did much but collect my time and money form being around the place. Then, when it was left up to others to do what Skeeter did ... Well, they are now seeing it was not so simple. After all, I grew with the position through the years, knew the people and knew how to handle issues to meet the customer's satisfaction. My boss is still there and she simple told them to do what Skeeter use to do ... after all ... it worked for him for many years. She was good at letting me go and do pretty much what I wanted to do and allowed me to take much of the summer off while she took much of the fall off. We could cover and work one anothers desk. Now she seems to have the mind set to let them learn on their own, much like she and I did. This is a small family run business and I handled much of the back office and she handled the front office and we could switch off while the others reported to us.
I have started billing them for my time when they call because the cusomers ask for me and if I have to come in to the office the rate is subject to what I find must be done. Somebody is going to screw something up real soon and real good ... and, I don't want to be around when they do. I don't think my boss does either and if she did not own the place she'd probally be out of there ... trying to kick back like I am doing. By the way I will get income trails for the next three years form the firm plus time that I might bill for my time. Told her she had to stay until my trails were paid.
So Art, That's how it is going. And, oh yes ... I play golf on Thursday afternoons and then drive to the coast for the weekend and then back to Charlotte on Sunday evenings. The wife still works in the local school system as a 52 week employee ... but, she works Monday thru Thursday through the summer months plus taking vacation. She will retire out of the system in about two years. We plan to gift the Charlotte homestead to our son when we move to the coast as it was gifted to us by my parents plus we have our own home too. In this way, we should be well pass the look back should we fall in poor health in the years to come and run out of money. I don't think so ... but, one really never knows.
I am still trying to find the time to start a restoration project on my 1992 Jeep Cheorkee that I have had for many years. I went and looked at a new one but just value my capital too much to let go of it. The Jeep needs a rear main seal, a set of new tires and just gone over in general but overall all I'd start out to the west coast in it on most any day. It is needed to put the boat in and out of the water at the coast and trail it back and forth during the off season rather than paying high slip and storage fees in the inlet. I have ramp acces through my HOA but not long term dock and storage.
I am not going there with Catch22 & Ted. There seems to be something of an issue ... hopefully, it will get worked out. They both are contributors and I would hate to see either leave. But, I do not enjoy the ongoing feud either.
I could go on ... but, I'd get in a rant. And, I just don't want to do that. Not now anyway.
Have a good one and thanks for asking.
How was the book?
Skeeter