Every so often friends or co-workers ask me to review their investment portfolios. They ask because they’re not happy with their returns, and seem to believe that I can provide some kind of commentary. I always remind them that I’m not an expert, nor am I licensed to advise them, but I’m happy to give them my personal opinion of what to consider.
Most of the time it’s a simple answer, the markets are just doing their thing and investors should stick to their plan. However, I’ve quickly learned to ask one question right away. How many mutual funds do you own? Most of the time they won’t even know, but when they report back to me the answer is shocking. I’m all for diversification, but is owning 10 + mutual funds beneficial?
How many mutual funds do you need?
Canadian investors can easily get away with owning just 4 mutual funds – you can even reduce that number to 2 – 3 by using ETFs. Take a look at the following funds from the TD e-Series line of mutual funds.
- TD Canadian Bond Index – e (TDB909)
- TD Canadian Index Fund -e (TDB900)
- TD U.S. Index Fund – e (TDB902)
- TD International Index Fund – e (TBD911)
The above mutual funds are popular with DIY investors and are one of the recommended portfolios if you’re following the Canadian Couch Potato strategy. By owning these funds, you’ll have a well-diversified portfolio that gives you exposure to the entire world.
It’s okay to add more mutual funds to your portfolio if you want to diversify into different classes, just make sure they meet your objectives. You can even be lazy and own just one mutual fund if you decided to invest in the Tangerine Investment funds.
Too much diversification?
We’re often taught that diversification is vital, hence the reason why mutual funds were introduced in the first place. Why own a few single stocks when you can buy a mutual fund that gets you thousands of stocks? Of course, each mutual fund is different, so you can’t just own one.
As stated above, if you have the right mix of funds, then it doesn’t matter how many mutual funds you own. The problem is that many investors end up owning different mutual funds which have overlap, especially in Canada where our major sectors are finance and oil. In this case, you could end up owning multiple mutual funds and not actually be diversified.
It’s pretty easy to own quite a few mutual funds by accident. Many people are invested in various funds through their employers, but once they leave the company, they just leave them sitting there. However, some people end up with too many funds based on the advice of their advisor.
Why do financial advisors recommend so many funds?
I hate to generalize, but most of the time when I see people with way too many mutual funds – think 10+, they’re working with an advisor at a major investment firm. You know the ones that are famous for charging high fees?
As investors, we need to know how our advisors are being compensated. Does our advisor receive an up-front commission or is there some kind of trailing fee that they get? Do they get some bonus when they sell funds owned by their employer? There’s always a possibility that they’ve been compromised.
I would seriously question why an advisor is constantly recommending so many mutual funds. Find out exactly why they’re recommended them, what value they offer your portfolio, and how much money they’re making from each fund.
How many mutual funds you own really doesn’t matter, but you definitely don’t need a lot to create a well-diversified portfolio. Having too many mutual funds does make things more difficult to track and manage, so maybe it’s best to keep things simple.