The Sixth Rule of Successful Mutual Fund Investing:
CONCENTRATE YOUR PORTFOLIO IN JUST A HANDFUL OF FUNDS
Once you have decided on an asset allocation and diversification approach to use in your portfolios, you can move on to selecting the funds that it your goals. In doing so, keep in mind that most investors can create a fully diversified portfolio of mutual funds with no more than five or six funds.
That’s all it takes to provide the bulk of the advantages of diversification. Too many investors mistakenly believe that “the more funds, the better” when it comes to their portfolios. In fact, mutual funds are already diversified vehicles in that they own dozens or hundreds of individual securities.
Certainly, very few investors need to own more than a half-dozen mutual funds in a single account. Owning too many funds results in “over-diversification,” where the investment returns of the funds are likely to regress to the mean, which is a mathematical way of saying that they are more likely to perform in line with the overall market averages and will reduce your chances of performing better than the market. After expenses, you will surely short of the returns earned by the overall market. You’d be better off owning an index fund that tracks the overall stock market index (like a Dow Wilshire 5000 index fund) instead of owning so many different mutual funds.
This concludes the six rules of successful mutual fund investing series.
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