When Looking At Diversification Of A Mutual Fund Portfolio, How Many Mutual Funds Should I Be Buying Into?
I am 24 years old and looking at my future investments in my Roth IRA. Right now I own shares of 3 separate mutual funds, divided equally by initial monetary investment. Ratings below are from Morningstar.
-FDFFX: Fidelity Independence, a 3-star rated Large Growth Fund.
-FICDX: Fidelity Canada, a 5-star rated Foreign Large Blend Fund.
-HIINX: Harbor International, a 4-star rated Foreign Large Value Fund.
With the upcoming year for contributions of up to $5k, I am looking at the potential of either buying into 2 new funds (typically most funds I look at have a $2500 buy in), 1 new fund and adding to my already existing funds, or not buying into any new funds and purchasing only more shares in my already existing funds (which are a bargain with the market the way it is).
I feel as though buying into 2 more funds is the best bet for this year, but at what point will I have enough diversification to start reinvesting in already existing good performing funds versus continually making minimum purchases into new funds?
About me: At 24 years old I am not worried about risk. I prefer extreme risk with the possibility of extreme gains. Because of this I am looking into this year buying into some Small Cap Value funds, especially in foreign markets. Right now I’m running a 68% foreign / 26% domestic / 4% short-term.
I am not specifically looking for a fund recommendation as much as I am overall investing strategy for the upcoming 3-years with suggestions of fund TYPES that I should be buying into. Also I wish to know when should I stop buying MORE mutual funds and start reinvesting into already held high performing funds..if ever. Thanks!
For diversification, putting it into five or so funds that invest in different types of stocks is best. You shouldn’t put it all into an S&P500 fund, because that fund only represents 500 of the biggest companies in the United States — it doesn’t cover small-cap stocks or foreign stocks, for example. You should probably have a large-cap fund, small-cap fund, foreign-stock fund and maybe a value fund and a growth fund. If you buy to many funds, you are likely to have overlapping investments and would be less diversified.
You seem to be in all large caps. you should look to diversify. I also like American funds, but Vanguard funds have low costs.
It is not how many funds you own, but what they own that matters. One fund can be more diversified than 5 or 20. You need to be sure they have different approaches and different asset classes (don’t forget about bonds, real estate, and metals). Try to understand where and how they overlap. And not just what stocks they own the same, but what risks they are attached to. Owning banks in ten different countries still leaves you exposed to global financial woes.
How about putting it all in one fund. I suggest the Vanguard S&P 500. It’s an index fund that covers basically the whole market. If you invest in a lot of funds, you are going to end up with the whole market anyway. No matter what style of fund you select, you can probably find a Vanguard fund that does the same thing with a whole lot lower expenses than you’re in now. Activly managed funds have highly paid managers and a lot of expenses, which cut into your profits. In the long run, managers have good years and bad years. So, in the long run, you will have average results.
Investing in mutual funds provides broad diversification.
While I don’t use mutual funds, 5 funds should provide all you need, assuming you aspire to those managers.
Don’t treat any of your money as being in a vacuum. You will spend at least 1/3 of your life in retirement.
You seem to have an appreciation for what your needs are.
I would only suggest, at age 24:
about 40% in USA
about 40% outside USA
about 20% in debt, mostly in USA corporates.
Hope this helps
I am not sure what you mean by “I would like to treat my IRA as if it were in a vacuum”. Do you mean you want to buy and forget about it (hold it and not have to worry/check up on it) until you retire? In that case, I suggest you switch you current funds and a portion of all future contributions to one well diversified “core holding” fund like a Target Retirement fund from T. Rowe Price (if you like active managed funds) or Vanguard (if you like index funds) I do not like Fidelity for this because they add an extra layer of management fees to their funds. T. Rowe and Vanguard are the lowest cost funds I have found. After establishing this “core fund” for a portion of future contributions, you could invest in whatever sector funds or ETFs you like at the time (in a “don’t forget about/keep up to date on their performance part of your portfolio) (Fidelity and Vanguard have plenty to choose from) to add a little higher growth/risk to your nest egg. The number of these “non core/trading funds” depends on what you think will do well for the next few years.