| Sargent & Lundy Savings Investment Plan |
| DIVERSIFYING TO THE POINT OF NO RETURN |
| The following excerpts are from an
article in the December 5, 1997 "Chicago
Tribune". The opinions expressed by the author,
Kevin J. Delaney, may or may not reflect those of the SIP
Committee. The mutual-fund bug first bit Linda Bergelson in March 1993, when she put some money into Strong Common Stock Fund. And it bit hard. Since then, the 52-year-old Ridgewood, N.J., resident has added 36 funds to her portfolio. Bergelson is one of a generation of Americans whose portfolios have swelled with the mutual-fund explosion of the past decade. Fifteen percent of fund-owning households now own seven or more mutual funds, according to the fund-industry association, Investment Company Institute. The accumulation of separate college-savings and retirement portfolios is partly responsible. There's also a pervasive pack- rat mentality that has led some investors to enroll in fund after fund without taking careful stock of their holdings. But most financial experts say that you can own too many mutual funds, and that if you have more than five or six, you might want to reconsider hour holdings. the additional funds can prove time-consuming to juggle and even cost you in long-term returns without providing much in the way of diversification. So, how many funds are too many? "I'd say there's diminishing returns after five or six funds," says Andrew Mehalko, director of research for DCA Global Investment Management in Ft. Lauderdale. Mehalko recommends his clients hold fewer than a dozen funds, and no more than one fund in the same asset class and investing style. "I could see 12 to 15 funds, 15 really being a stretch," says William John Mikus, an investment adviser in Hermosa Beach, Calif. "You start to max out around 15. There's really nowhere else to invest." According to Morningstar's analysis of U.S. stock funds, the risk- reward profile levels off after about 10 funds and additional funds beyond that do little to reduce investors' vulnerability to stock-market declines. After all, the average U.S. diversified equity fund holds stock in 128 companies. Broader portfolios generally also minimize the chances that an investor can beat the market. The more funds you own, the more your returns look like the rest of the field. That's because the lower-returning funds begin to cancel out the gains of the highest fliers. Many advisers recommend that individuals break down their equity investments into a mix of large-cap, small-cap, value, growth and international funds and add at least one bond fund. The exact combination depends on an investor's age and risk tolerance, but generally turns up a list of fewer than a dozen fund categories. Mikus likens being a mutual-fund pack rat to lugging around too many golf clubs. "If you're a golfer and you shoot 100, you're not going to shoot 90 because you're carrying twice as many clubs." |
This page updated on 3/10/98