Some people take a "collector's" approach to buying mutual funds: When they find something they like, they buy it. When they find something else they like, they buy that, too. Soon they have a dozen funds or more.
Is there an ideal number of mutual funds to own? Forbes recently asked three experts of widely varying opinion.Sir John Templeton, the dean of global investing, says that one fund is plenty.
"If you own a fund that can invest without restriction in at least 100 different stocks and bonds worldwide," he says, "then one fund is sufficient diversification."
The Value Line Mutual Fund Survey told Forbes it suggests owning 11 funds. It recommends one from each of the following stock categories: growth, growth and income, small company and international; and two funds - one long-term, one short-to-intermediate-term - from each of the following bond groups: corporate, government and municipal. They'd top it off with one mortgage fund.
Sheldon Jacobs, editor of the No-Load Fund Investor newsletter, has a similar view.
"You really can't get enough diversification. You should diversify not just stocks but managers. I think a large investor, someone with $1 million or more, could easily have 20 funds."
Here, says Forbes, is why it doesn't agree either with one-fund Templeton or with the more-the-merrier folks.
"The problem with owning only one fund involves taxes: You limit your ability to benefit from tax swaps. If the U.S. stock market tumbles, you may want to sell one U.S. fund at a loss, then immediately buy another to recreate your position at a lower cost basis. You cannot do that with a global fund; you must own a separate U.S. portfolio."
Here's another tax subtlety. If you want to divide your assets between stocks and bonds, and if you are in a fairly high tax bracket, it doesn't make sense to own all these securities in a single entity, says Forbes.
Forbes recommends owning six funds: one domestic stock fund, one international stock fund, one junk bond fund, one municipal bond fund, one Treasury or mortgage bond fund.