How Many Mutual Funds Should You Own?
How many mutual funds do you need to own? For many, one may be appropriate.
The Vanguard Total World Stock Index ETF (VT) provides a global mix of stocks based on market capitalization. With one fund you own 3,797 stocks across the globe managed in a successful, passive approach to investing.
Most investment advisors use closer to a dozen funds to capture the same exposure to the global markets.
Those that do may argue that there is a benefit to owning more funds in that there is the possibility to capture taxable losses. The merits of this strategy are debatable. There are cost issues with excess transactions, questions about the actual benefits of capturing losses, as well as an impact on the portfolio being out of the market and needing to purchase a less ideal fund to replace the asset class sold out of. By owning a whole market fund, losses will offset gains each year as positions are rebalanced, and so the issue may only be one where you may control the capturing of the loss, versus one where it is taken care of for you.
The benefits of a lower number of funds include a consistently balanced investment plan, as well as reducing the time and costs of rebalancing.
When would you want to add more funds? When you are younger, have a longer time horizon, or take on a strategy of assuming more risk by investing in smaller company stocks. There are very few funds that own the market in a low-cost, passive approach that tilt towards the small and value areas of the market, the one example that stands out to have a slightly more aggressive tilt is the DFA Global Equity I (DGEIX).
A whole world fund like DFA Global or Vanguard Total World Stock could be supplemented with a few targeted funds in those areas to achieve the same diversification with less rebalancing than the vast majority of managed portfolios than hold a dozen or more funds. This approach works well for those that believe that segments of the stock market that are more aggressive or tax-efficient should be held in various accounts. Still, having a strong core position in a global fund provides support to the overall investment mix.
Obviously the above addresses the equity portion of your mix, however the same strategy can be used for bonds. Alternative asset classes for the most part still need to be managed in targeted individual funds. However, two to six funds can provide all of the diversification and less of the headaches in managing a more commonly seen portfolio of a dozen or more fund.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/