Sometimes we feel like a broken record…and maybe we are, but this should be repeated. Increasing the number of holdings in your account does not mean you are increasing the benefits of diversification.
Think about a portfolio that has exposure to multiple mutual funds that focus on the US Stock Market – Large, Small, Value, Growth, etc – all the boxes are checked and each manager has a 5 star rating. The average number of holdings in each fund is 100 stocks and to top it off, the expense ratio is reasonable at just .85%. Sounds like a solid portfolio, right?
This portfolio is one we see daily – multiple mutual funds with solid ratings…but it consistently under-performs the benchmark. Why? Because it IS the benchmark with a fee. The more managers you add, no matter how great they are, their ability to create value for your portfolio decreases. As elusive as excess returns already are – too much diversification makes it next to impossible from a total portfolio perspective.
If you want to own the market – go do it for next to nothing. Otherwise, find a manager who has conviction in what they do and don’t water down their impact. Put in the effort to understand the approach and the research behind it. Having an idea of when it will look great and when it won’t leads to the discipline needed for long term success.
Are you truly diversified or are the 10 funds you own really just one big fund? Better to answer that question before the market answers it for you.