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Sound Advice: June 19, 2024

Think You’re Diversified?  Think Again

Far too often folks think that buying a bunch of mutual funds will give them the diversification they need, but the reality is that most mutual funds are first cousins of lemmings.  As mutual funds gain popularity, their assets increase.  As their assets increase, the universe of stocks they can buy shrinks. Why is that?  Because the size they need to buy increases.

When a fund has only $100 million in assets, it typically will have individual commitments of $1-3 million.  At that level, the choice is either a sizable commitment in a smaller company or a relatively small piece of a larger company. 

But when a fund has $10 billion in assets, each of its commitments will be on the order of $100 million or more.  That will eliminate many smaller companies simply because the fund would end up being a major shareholder of those companies.

As funds grow, the choices of stocks are fewer and the likelihood of duplication of holdings from fund to fund increases dramatically.  So even if you own 10 funds, it’s likely that many of the holdings will be duplicated across the board.

To get a better handle on this, we took a closer look at 10 of the more widely held funds.

The result: Nvidia was held by all funds.  Microsoft and Alphabet (Google) were held by nine funds.  Meta (Facebook) was held by eight funds.  Amazon and Apple were held by seven funds.

 

 

 

 

 

Fidelity Blue Chip

Growth Fund of Amer.

Fidelity Mega Cap

Payson Total Return

Fidelity Controfund

Nvidia

Microsoft

Microsoft

Apple

Meta

Microsoft

Meta

Exxon Mobil

Broadcom

Berkshire Hathaway

Amazon

Alphabet

Wells Fargo

Nvidia

Nvidia

Apple

Amazon

Nvidia

WEX, Inc.

Microsoft

Alphabet

Broadcom

GE

Meta

Amazon

Meta

Nvidia

Apple

Microsoft

Lilly

Marvell

Lilly

Bank of America

CDW

Apple

Liffy

GE

Meta

Visa

Alphabet A

Netflix

Netflix

Boeing

Lam Research

Alphabet B

Snap

Mastercard

Alphabet

Wells Fargo

Amphenol

Wellington Fund

T. Rowe Price Blue Chip

Oakmark Fund

T. Rowe Cap. Apprec.

State St. Core Equity

Microsoft

Microsoft

Alphabet

Microsoft

Nvidia

Alphabet

Amazon

Citi

Alphabet

Microsoft

Amazon

Apple

Wells Fargo

United Health

Apple

Apple

Alphabet

Schwab

Amazon

Alphabet

Meta

Meta

GM

Revvity

Amazon

JP Morgan

Lilly

Deere

Cdn Nat. Resources

Meta

Merck

Visa

AIG

Becton Dickinson

Broadcom

Progressive

United Health

Conoco Phillip

Waste Connections

Merck

Nvidia

Mastercard

Nvidia

Nvidia

United Health

United Health

Nvidia

Fivserv

Fortive

S&P Global

 

 

 

 

 

 

 

 

 

Forget about diversifying by buying multiple actively managed mutual funds.  Better to buy one low-cost index fund.  You’ll save money and get the same equity diversification from that one fund.

 

N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877

www.soundasset.blogspot.com

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