Is it possible to invest in too many mutual funds?

One of the hallmarks of investing is diversification.  Having a portfolio that’s sufficiently diversified means having a wide mix of different assets so that, if some are not doing well, the ones that are will support it, This basically means spreading your money around in different assets and investments so that, should one of them fail, the others will be there to protect your wealth.

On the other hand, some consumers and investors actually spread their money a bit too much, and end up with a portfolio that, rather than being a coherent whole, is a jumbled mess.

The reason that diversification works so well is that, in the long run, it gives your portfolio the ability to generate much higher return with a much lower risk. That being said, there’s no need to get extremely fancy with your portfolio’s assets because it’s quite easy to cover all of the major sectors of the stock market and bond market with only 2 or 3 ETF’s or broad index funds.

For example, you could get a total stock market index fund that covers the US, or do the same thing but make it international stocks. You can even get a target date retirement fund and completely diversify your portfolio in one fell swoop.

That’s not to say that adding some funds, ETF’s, a real estate commodity or even some Treasury Inflation Protected Securities (TIPS) is a bad idea, especially if you want to protect your portfolio from inflation. If you’d like to protect yourself against rising interest rates you could also get a short-term bond fund or, for a little bit of tax-free income, a municipal bond fund.

Want income that’s more assured than what Social Security can provide? Throw an immediate annuity into your portfolio and you’ll be all set.

The point being is simply this; once you have a nicely diversified portfolio, filled with a smattering of asset classes, there’s really no sense to keep piling on more. The first thing it does is make managing your portfolio a lot more difficult and, if you need to rebalance it, a big hassle. Depending on the type of investments that you choose you might also find that your fees go up sharply, bringing down the performance of any assets you have.

If you’re not sure about the health of your portfolio, you can always get MorningStar’s Portfolio Manager. Once you put in the names and/or ticker symbols of all of the funds that you own, you’ll get a great overall view of your portfolio and the different asset classes that you have. You’ll also see what type of expenses you’re paying and possibly where some of your funds might be overlapping.

The best thing is that, when you’re done, you’ll have a much better idea of whether your portfolio is as diversified as it needs to be and also if it falls in place with the risk tolerance that you have. If it does, there’s really no need to do more.

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