FYI:(The Linkster will accept eight, but I prefer 4 to 6 !)
Time to take an inventory of your mutual funds. How many are there? What are their investment styles? Is your portfolio of mutual funds cluttered just like your closet? Have you owned some mutual funds so long that you have forgotten why you bought them? Are there some mutual funds on the top shelf, way in the back of your financial closet you haven't even looked at in a while?
Adding new mutual funds to your portfolio is far easier than reorganizing your fund portfolio and discarding inappropriate, redundant, or simply poor-performing mutual 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.
Regards,
Ted
http://www.aaii.com/investing/article/2-how-many-mutual-funds-should-you-have-in-your-investment-portfolio
Comments
From the author: "Should you consider mortgage-backed bond mutual funds for your portfolio? Probably not. A diversified portfolio of mortgages that promise higher returns than a U.S. government bond portfolio of similar maturity does have some appeal. However, mortgage-backed funds have at times behaved as badly as gold funds. When interest rates rise, bond prices fall and the share prices of bond mutual funds also fall. So, as an investor, when rates rise, you want a mortgage-backed bond fund to act contrary to a bond, but it doesn't. When interest rates fall, the prices of bonds and bond mutual funds rise, but a mortgage-backed bond fund will respond more to the mortgage market. When mortgage rates fall along with interest rates, mortgages are refinanced and part of your investment is essentially handed back to you to be reinvested at lower rates."
>>>I just grabbed two funds related to the sectors mentioned in the write, out of the air, to compare........at the below graphic. I used a time frame starting about midyear 2006 to present.
http://stockcharts.com/freecharts/perf.php?FMSFX,FSAGX&n=2786&O=011000
Gosh, I know a few folks who have 20 funds each, but wait, they're spread over 4 account types from different vendors. They still meet the strict limitations, I suppose.
I personally see no need for 20+ funds but ultimately, fundly, you are correct.
Oh well ... Another article written, from my perspective, to collect writting fees.
http://www.mutualfundobserver.com/discuss/discussion/19197/how-many-mutual-funds-should-you-have-in-your-investment-portfolio/p1
According to the millionaire teacher, Andrew Hallam, the proper number for a diversified portfolio is a mere 3.
His simplistic 3 includes all low cost index funds: a US equity index position, an international index product, and a short term bond index holding. These are consistent with Hallam's 9 rules for wealth. Here is a summary of those 9 rules that I lifted from one of his book reviewer's assessment:
Hallam’s 9 Rules of Wealth
Rule 1 is to spend like you want to grow rich, which means cultivating frugality whether buying homes, cars or daily items.
Rule 2 is to take advantage of compound interest by starting investing as early in life as possible — but only after high-interest debt is eliminated. (I agree!)
Rule 3 recaps the negative impact of high fees and thus the case for indexing: “Small percentages pack big punches.” Here he takes a skeptical view of the motivations of the financial services industry generally.
Rule 4 is to “Conquer the enemy in the mirror.” It looks at the problems of stock-picking and market timing, fear, greed and other emotions that can sabotage investing.
Rule 5 is to build a “responsible portfolio” that includes both stocks and bonds. Here Hallam introduces what he terms the Couch Potato Portfolio.
Rule 6 looks at indexing in the U.S, Canada, Australia and Singapore.
Rule 7 is entitled “Peek inside a pilferer’s playbook.” It looks at common sales practices of financial advisors and brokers. He starts by suggesting that those planning to own their own indexed account at a discount brokerage may want to find a fee-only adviser who can set it up for you.
Rule 8 is “Avoid Seduction,” and looks at the various distractions that some term “financial pornography” — investment newsletters and magazines, junk bonds, gold and hedge funds, which Hallam describes as “the rich stealing from the rich.”
Rule 9 is for those who love to pick their own stocks if “they can’t help themselves.” Hallam’s solution is to stay 90% indexed but to allocate 10% to individual stocks if you find it enjoyable.
He wisely allows a 10% deviation from his most efficient portfolio to allow for individual flexibility and initiative. We are not robots. I wish you all good luck, successful investing, and a long prosperous life for you and your family.
Best Regards
I try to employ GWB's quotable "strategery" in assembling various funds.
One thing to think about - if you tend to trade often, having a good GNMA (or Blue Chip or EM) fund at a couple different houses may help keep you from running afoul of one or the other's frequent trading regs.
Increasing the number of actively managed mutual funds in a portfolio simply increases the odds of underperforming the marketplace. It is a Loser's strategy because the actively managed funds global distribution curve is not symmetrically centered on a benchmark. It is skewed in the underperformance direction!
How much will it underdeliver? Taken at the extreme of owning all active funds, the underperformance will equal the cost of that active management and trading costs. Professor Bill Sharpe recognized and published this observation decades ago. We are slow learners.
Of course, most of us will never own all active funds. But as we approach that limit, the odds of filling our portfolios with underperforming active funds simply increase because so many of these funds are losers relative to a benchmark, especially over any extended timeframe. There are far more underperforming than outperforming active funds. The accumulated historical data demonstrate that reality.
It's equivalent to a steam engine. You can't get more out of the engine than the energy potential fuel that goes into it. Optimism can't defeat the practical laws that govern in the total marketplace. Too, too bad!
Ted has it about right in terms of numbers. Precision is not possible and is not required since all individual situations are different.
Best Wishes
choose your mix
According to Britannica, "Energy conservation, however, is more than a general rule that persists in its validity. It can be shown to follow mathematically from the uniformity of time. If one moment of time were peculiarly different from any other moment, identical physical phenomena occurring at different moments would require different amounts of energy, so that energy would not be conserved."
https://www.britannica.com/science/conservation-of-energy
And I like the steam engine analogy. Once we get all those West Virginia and Pennsylvania coal miners back to work there will be a lot more steam locomotives making their way across the country. Progress!
Thanks for your informative reply. I had no understanding of what happens to the conventional physics of the conservation laws if time were distorted. From a practical perspective, I don't worry much about that probability.
All analogies are imperfect approximations, and my steam engine analogy is one of them. With some fear, allow me to stretch that imperfect analogy one level deeper.
Energy is conserved in the steam engine, but it is distributed in a way that mirrors what happens with active fund managers. The engines efficiency or useful work output is reduced by friction heat. In the investment universe equivalent, the useful market return goes to the investor minus the frictional heat in the form of management fees and frequent trading costs that mostly go the active manager cohort. Indexing and infrequent trading minimizes those frictional drag inefficiencies.
Warping time and the steam engine analogy are getting too complex for my limited understanding of Einstein physics and also my limited understanding of how the marketplace really works.
Best Wishes
One Fund: VWIAX
Two Funds: VWIAX and PRWCX
Three Funds: VWIAX, PRWCX, PIMIX
Four Funds: VWIAX, PRWCX, GLIFX, PIMIX
Five Funds: VWIAX, PRWCX, GLIFX, PIMIX, DSEEX
Six Funds: VWIAX, PRWCX, GLIFX, PIMIX, DSEEX, SIGIX
Seven Funds: VWIAX, PRWCX, PIMIX, GLIFX, DSEEX, SIGIX, POAGX
Yes, some of these funds are closed to new investors, but many forum members own these closed funds or can be gifted shares.
Kevin
The financial community typically "measures" volatility as standard deviation, which represents the fluctuations of a security over time.
That's what distinguishes the effect the article was conveying from volatility. Most of the time, MBS funds are well behaved and return slightly more than vanilla bond funds of comparable duration and quality. So they are not especially volatile. But under the right (wrong?) conditions, they can become unstable; prices can fall fast and hard. It's largely because of their negative convexity.
There's a built in expectation that a certain number of people will redeem the mortgages early - either because they're selling their homes or because they can refinance at a lower rate. As interest rates rise, there's less propensity to refinance, and you wind up stuck with lower paying bonds that people aren't redeeming as fast as you expected. That makes them longer term and thus further depresses their prices.
There can be economic conditions (e.g. a shrinking job market) that might dissuade people from moving (and thus paying off their mortgages). This too means that the bonds effectively become longer term, which causes their price to drop.
Or people may not refinance when interest rates drop because they're underwater and are unable to. That would be positive for bond prices, as you get to hold onto bonds with above market yields.
Then there are behavioral factors as well. Just because it makes economic sense for someone to refinance doesn't mean they will. People are not entirely rational.
Add it all up and there are lots of factors that can trigger a rapid movement of MBS prices. You don't see this effect often (hence the funds aren't extremely volatile), but the risk is always there.