Holding too many investment funds can hurt you

Holding too many investment funds can hurt you
Eileen St. Pierre, The Everyday Financial Planner

I’ve seen a lot of investors who own way too many mutual funds. Financial advisors never seem to recommend selling funds. That’s because most get paid when you buy in, not when you sell. If they really had your best interests in mind, they would determine if the fund met your investment objectives. If it didn’t, they need to explain to you why it doesn’t and recommend you sell it. There is no shame in selling. Holding too many investment funds can hurt you.

Some funds may not be suitable.

You may not have understood the investment objectives of some of your funds. Perhaps they were not explained properly to you. While I can tell a lot by looking at the fund’s name, at a minimum I always look at the fund’s summary prospectus to determine if it meets my client’s needs.

It is important to update your financial plan. Your investing goals and risk preferences may have changed and a fund may no longer be suitable.

Some funds may not be necessary.

Do you know what securities your funds hold? I like to go to www.morningstar.com, look up the fund’s ticker symbol and get Morningstar’s free reports. If I see a client who has three funds that basically invest in the same securities, I pick one for them and encourage them to sell the others. Here are some factors I consider to help me make my decision:

excessive fees

  • What is the fund’s annual expense ratio? Do you just have to pay a management fee or is there also a 12b-1 fee? A 12b-1 fee is a fancy word for a marketing fee – part of which goes to the advisor who recommended the fund.
  • What is the turnover ratio? If the portfolio manager is constantly buying and selling securities in the fund, this will increase the annual expense ratio. Is there a reason the turnover has to be so high?
  • Is there a redemption fee? In other words, do you have to pay a fee to sell the fund?
  • Even though past performance is not a guarantee of future performance, how well have the funds performed over the past five years?

Diversification can now be achieved with one fund.

Instead of trying to select funds to meet your investment objective, you may be able to find one fund that holds the right mix of individual funds already. The best example here are Target Date and Lifecycle retirement funds. These funds hold a mix of stock and bond funds and gradually re-balance your portfolio towards a safer basket of securities as you approach your retirement date. 

Fees can really add up over time.

If you have to pay sales charges or front-end loads to buy into a fund, that’s less money for you to invest upfront. Let’s say you invest $10,000 in a mutual fund that charges a 5% front-end load. You will only invest $9,500 of that money; your advisor will keep $500. If that money is invested at 8% for 10 years, you will earn $1,080 less than if you had invested the full $10,000.

For more information on investing, visit my Basic Financial Management page.