Recently, I was asked by a reader of my newsletter about my opinion on a variety of no load funds and ETFs he was considering for his portfolio.
It turned out that, as a beginning investor, he had a fairly small IRA (around $20k). He had planned on investing this money in some 10-12 no load funds and ETFs.
Whoa!
In my advisor practice, I have the opportunity of reviewing a lot of existing portfolios of new clients as they come aboard. Over the years, I have noticed that many investors do a good job of selecting well performing funds, but they fail in two areas:
1. They fall in love with their investments and forget to sell (however, that’s another story) and
2. They buy too many funds/ETFs for the size of their portfolio.
While there is no ideal number as to how many funds/ETFs a portfolio should contain, it depends on the type of portfolio. The above investor, with his $20k IRA, should be in 1-2 funds/ETFs if he’s investing for growth. Given current market conditions, that would translate to 1 domestic fund/ETF and 1 international fund/ETF.
A typical growth portfolio of $100k in today’s market would have about 3-4 domestic funds/ETFs, 1-2 international funds/ETFs, about 2-4 sector ETFs and maybe 1-2 country ETFs, where sector and country allocations are about 5% each of portfolio value.
If I invest that same $100k for income only, I diversify more by selecting about 8 different income CEFs (Closed End Funds are my preference) since they each react differently to changes in interest rates.
How about a $500k growth portfolio? It’s not that much different from the $100k portfolio, only the holdings are larger. I may add 1 to 2 more funds, depending on market conditions, but it certainly would not contain 5 times as many holdings.
When you invest in no load funds and ETFs, select your holdings carefully, but don’t over-diversify, especially with a small account.