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.
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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
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