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Fund basket overflowing?
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October 15, 1997: 3:12 p.m. ET
More funds might mean less risk, but only up to a point
From Correspondent Carmine Gallo
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NEW YORK (CNNfn) - Mutual funds aim to reduce the risk of investing by spreading the money around. The average U.S. stock fund invests in 130 different companies in the hope of avoiding downward volatility. The technique has, of course, been quite popular with investors, resulting in the number of stock mutual funds soaring 500 percent over the last ten years to nearly 5,000.
However, some investors have bought into dozens of these funds, and David Harrell, mutual funds analyst for Morningstar.Net, warns that this might not be the best strategy. "We did see that . . . the first five funds that you added . . . did see a reduction in volatility of the portfolio," he explains, but "once you got beyond 5 to ten funds, there was really no change."
According to Morningstar, adding funds to a portfolio does not necessarily increase returns, either. In a study measuring the balance of risk to reward, portfolios of up to five funds had the best chances of making better-than-average returns.
Industry analysts also warn that diversity of stock categories is important when building a funds portfolio. Sheldon Jacobs, editor of The No-Load Fund Investor, recommends that individuals put 20 percent of their money into international funds and 80 percent in U.S. funds, split between small-, mid-, and large-company stocks.
James Epervary, Manhattan area manager for Charles Schwab, explains this policy. "Let's say you're investing in large cap stocks. Well, there's only so much of a large cap universe that's out there, so if you're in a lot of large cap stock funds and you look at the top ten holdings, you'd find many of [them] are similar."
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