clock menu more-arrow no yes

Filed under:

Diversifying takes savvy, pays off

Diversifying your investments isn't as easy as it sounds.

Investors give the concept some lip service but are often unaware of what stocks their mutual funds actually own. For all they know, their fund portfolios overlap like crazy.

Sometimes fund families are to blame. Consider the case of the growth-oriented Janus Funds, which skyrocketed from $3 billion in assets to more than $300 billion during the 1990s. Many Janus investors, sold on the concept of holding a group of funds within one fund family, felt they'd covered all their bases. They were wrong.

As the stock market corrected, it became obvious that Janus owned a lot of overlapping stocks in multiple portfolios. For example, the same six stocks were among the top 10 holdings in the Janus Fund and Janus Growth and Income. When tech stocks tanked, the family's funds tumbled in unison.

"A year and a half ago, we'd pointed out that one should only buy one or two Janus funds, never five or six of them," recalled Sheldon Jacobs, editor of The No-Load Fund Investor newsletter, 410 Sawmill River Rd., Suite 2060, Ardsley, N.Y. 10602. (Look online at www.sheldonjacobs.com. "Even at Fidelity Investments, with 200 funds, it's possible to own three or four funds with similar objectives, so you must compare their portfolios."

Convenience is the main reason investors stick with one fund family, Jacobs noted, though they can also go through a "fund supermarket" or selected brokers to obtain hundreds of funds from different families and a unified statement. Popular stocks such as Cisco Systems, Microsoft and Intel often turn up in portfolios across many competing fund families.

Fidelity Advisor Technology, Turner Select Growth Equity and Janus Twenty all had more than 8 percent of their holdings in Cisco stock last year, which subsequently fell into a downward spiral.

"The problem is when investors don't look across their entire personal portfolio," warned Reuben Brewer, manager of mutual fund research for The Value Line Mutual Fund Survey, P.O. Box 3988, Church Street Station, New York, NY 1008-3988 www.valueline.com. "Are they buying four growth funds, thinking they're increasing diversification, only to wind up with more than 5 percent of their personal portfolio in Intel?"

Investors go after funds that have the "hot hand," Brewer noted. By chasing that hot hand, they buy funds that invest in similar ways. Value Line recommends a portfolio allocation across 10 different areas.

For example, an investor should own large-caps, but that category should include both growth and value choices. A personal portfolio with funds encompassing large-, mid-, small-cap and international equities, and employing investment strategies such as growth, value and income, will provide diversity important for the long run. Tinker with the mix and play your favorites, but don't lurch between extremes.

"Portfolios I recommended did well last year because they weren't all in the NASDAQ stock market and technology, which so many investors were enamored with," pointed out Daniel Wiener, editor of The Independent Adviser for Vanguard Investors newsletter, 7811 Montrose Rd., Potomac, MD 20854 www.adviseronline.com. "In addition, a lot of people put their money in Standard & Poor's 500 index funds, which wasn't a smart move last year because large-cap stocks got hammered."


Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at successinv@aol.com.