We agree in part.

What I don't like to see as the portfolio grows, is being tied to a single, or few funds for performance.  Also, being in a 'well rounded' fund may limit the small caps, intl or other sectors that often have better performance.

Also, as the portfolio size grows to a critical mass,  swings can be tolerated without panic or jumping ship. This is assuming the fund is a sound investment.  For example, china last march. 

Or assuming that you have one targeted fund, therefore you should do well.  I have three china funds that have very little overlap in stocks, they don't have the same peaks/ drops.  I think this is better than putting all the money in a single china fund.  Hence understanding that investing in china is a risk, I'll put the eggs in three baskets.

 Bottom line is for all investors not to be a buy and forget!

I think I might have to disagree in part with Oil on this one because a target date fund, as a result of the mix of different styles, asset classes, etc. IS diversified, as you said.  A fund can have 150-200 holding (like a Magellan mentioned above) but because the stocks that are being selected fall into a similar criteria it can do quite poorly for a very long period of time.  In fact, if it is a flawed strategy it may never produce good returns.  So, even with hundreds of stocks in a particular portfolio, if the stocks are similar based on a discipline the manager implements, it might be considered diversified by "number" of stock holdings but does not produce the kind of diversification that most investors look for.  And what I mean by that, is owning securities that act differently in various market cycles.  Usually, owning several different funds (of course with different disciplines, asset classes, etc.) can create that kind of diversification.  I do agree however that many investors own way too many funds.  I will state for the record that I do have a huge bias in this case.  I dislike indexing and I have found it VERY difficult to find fairly young proven managers or teams that run funds that can meaningfully out perform over a LONG period of time.  With many proven managers being older it is tought to find someone you can stick with for a LONG period of time.  Many others don't pay attention to taxes and finally some of the best performance comes from funds that are not going to repeat performance because of asset bloat.  With that said, I have almost 80% of my invested assets with BRAGX and BRAIX.  51 yr old manager.  I would rather rely on a computer that a person (although the person must maintain and tweak the model to keep it a sound strategy) and he pays a lot of attention to taxes.  Yes, that is concentration but based on all of the issues I mentioned above, I find it very hard to build a portfolio spread out among several different funds that can outperform over a long period of time with tax efficiency (or at least tax aware).

80 % in two funds that have a 5 yr track record of 16-19 %..  not bad,

I'd rather have 10% in each of these and put some in funds like eurox, letrx, prlax that have demonstrated 40% over the same 5 yrs.

you'd have doubled your portfolio, rule 72.. in approximatley 4 yrs.

I would have doubled mine in 2 yrs, then again in 2 yrs, so at the end of 5 yrs I'd have more than tripled your's   with less sensitivity to the US market.  for example 2006 you'd be hurting. with a minor set back,  mine would have almost doubled in one yr for one fund.

I'll stick with a winner, yours gives me concern.

I'm looking at three simple portfolios published in Kiplinger's in May 2006. The long-term portfolio (5 funds, 10 years to retirement) allocates 25% to Bridgeway Aggressive Investors 2 (BRAIX); the mid-term (5 funds, 5 to 10 years) allocates 15%; and the short-term (8 funds, retired) only 10%. As retirement approaches, the allocation to BRAIX decreases as diversification increases. Asset classes perform differently at different points in the business cycle: Small-cap, mid-cap, large-cap, international stocks, even bonds all have their moments (sometimes years) in the sun. Too few funds can limit your total return, just as too many funds can flatten returns. As for the "ideal" number of stocks a mutual fund should own, I get a kick out this line from an interview with Acorn Fund's Ralph Wanger: "At any given time, I typically owned 300 stocks. Ten might soar, and that made all the difference."

BRAGX  nearly 20% since 1994   Outperformed in up market...outperformed in down market....did it tax efficiently and the guy is still 51.....Don't ever talk4 yr time period with me at least....for that matter talking less than 10 with me is a losing battle.

I disagree with your investment philosophy, but this is one where you really have to figure out what you're comfortable with.  There's not necessarily a correct answer.

My approach is similar to the one advocated by Warren Buffett.  To loosely summarize, Buffett's take on diversification is this: if you're clueless, pursue diversification; if you know what you're doing, pursue concentration. 

What I try to do is to thoroughly understand what I own.  Most investors just look at past performance and try to ride winners.  I read through all available reports, I dig through media archives, I study the strategy extensively, I look up historical material from various sources, etc. etc.  I also follow the academic literature on fund performance and I think I have a reasonable familiarity with how the fund industry works and what kind of incentives managers and fund management firms face. 

So I will choose a fund only if I have a very high degree of confidence in the choice after all factors are considered.  I invest with the intention to stay put indefinitely unless something materially changes such as the management, expenses, strategy, asset base, etc.  With this strategy, it doesn't make sense to own a large number of funds - I'm already investing in the fund(s) with the highest expected long-term returns, so I'm only diluting my expected returns if I add new funds.

There are several reasons why I don't recommend this strategy to others: 1. Most investors aren't willing to do this kind of "homework"; 2. Most investors are obsessively concerned with past performance; 3. Most investors do not have a basic understanding of probability and statistics; 4. Most investors let emotions dictate their investment decisions.  For these reasons, I don't think this would work for most investors. 

However, my point about pursuing diversification at the securities level rather than the fund level remains valid and applies to all investors. 

Best,
Oildog 

I agree with Oildog totally here... if you want to try active management your only chance for success is to study up, spread your money across a couple to several of the best managers you can find and ride it out... if you have a portfolio of 20 plus actively managed funds, if you think you are beating the indexes after taxes and transaction fees over a long period of time I think you are probably mistaken... after all, they call it an average because... its average!  The losers cancel out the winners leaving you with only the entertainment value of watching your portfolio over the years and a big tax bill... which might be worth it as long as you understand thats what you are doing... the only way you could possibly win that game is to select every single outperformer in advance... and the chances of that go down with each fund you add...

You dont really need more than one fund per asset class as the majority of funds are diversified enough to avoid stock specific risk on their own... you might have more than one if your funds are extremely focused or volatile or you might only have one fund if you can get into SGIIX and feel comfortable enough with the succession question... but certainly not more than two funds per asset class or you are giving up before you start...

When in doubt, do a M* Xray of your portfolio and look at the contribution of each stock from a percentage standpoint... if you have an endless list of stocks that contribute .005% to your returns, imagine how silly you are to pay that manager for his time picking that stock?

Ajw 

 

I have a question though as it pertains to this statement:

"so I'm only diluting my expected returns if I add new funds"

You are assuming that all other funds are likely to underperform the ones that you own, right?  If an investor owns 10 funds and there is an 11th fund out there that reasonably has the ability to perform better than the first 10 over some period of time, than by adding an 11th fund you are not diluting performance.  That would hold the same for individual stocks.  The question the investor needs to ask is: "at what point" does that additional fund no longer has the ability to equal or add to the performance and if it is not likely to equal or add to performance is it (because it better) going to lower the risk profile of the overall portfolio because of correlation.

ajwells:

I agree with Oildog totally here... if you want to try active management your only chance for success is to study up, spread your money across a couple to several of the best managers you can find and ride it out... if you have a portfolio of 20 plus actively managed funds, if you think you are beating the indexes after taxes and transaction fees over a long period of time I think you are probably mistaken... after all, they call it an average because... its average!  The losers cancel out the winners leaving you with only the entertainment value of watching your portfolio over the years and a big tax bill... which might be worth it as long as you understand thats what you are doing... the only way you could possibly win that game is to select every single outperformer in advance... and the chances of that go down with each fund you add...

You dont really need more than one fund per asset class as the majority of funds are diversified enough to avoid stock specific risk on their own... you might have more than one if your funds are extremely focused or volatile or you might only have one fund if you can get into SGIIX and feel comfortable enough with the succession question... but certainly not more than two funds per asset class or you are giving up before you start...

When in doubt, do a M* Xray of your portfolio and look at the contribution of each stock from a percentage standpoint... if you have an endless list of stocks that contribute .005% to your returns, imagine how silly you are to pay that manager for his time picking that stock?

Ajw 

This only is true if you are primarily investing in diversified funds.