How much to keep in one fund is common investment quandary

Your Funds

April 16, 2000|By CHARLES JAFFE

Somewhere in the middle of the recent stock market meltdown, many investors probably worried about whether they had too much money committed to some of their funds.

While their fears were triggered by volatility, the underlying question of "how much is too much" in one fund confronts all investors and confounds many.

Deciding the "right" amount to invest in a fund is a mix of asset allocation and gut feeling, a balance between safety and an often-overlooked type of risk.

On the one hand, studies show that between four and 10 funds are plenty to build a diversified, sensible portfolio and that more funds are likely to create higher costs and performance-dulling overlap.

On the flip side, many financial advisers suggest never holding more than 10 percent of your assets in one fund, a strategy that dictates owning a minimum of 10 funds.

Somewhere in the middle is the investor's gut, the part that may not be able to live with seeing a huge chunk of cash tied up in a single investment or with one fund company.

The decision of how much to hold in one fund is a balance of asset allocation and personal preference.

"This is a common problem that creeps up on people," says Mark Riepe, director of research at the Schwab Center for Investment Research.

"As their investments grow and the account becomes sizable, they say `Wow, should I really have that much money in there?'"

It's a nice problem to have, but worrisome, especially in times like these when the market is writhing like a freshly caught salmon.

Asset allocation involves developing a plan to apportion your money among various investment categories.

If one asset class grows particularly quickly -- as large-cap growth and technology stocks have in recent years -- you may find over time that your portfolio gets out of kilter and needs to be rebalanced.

From an asset allocation standpoint, it is possible to have too much money in a fund simply because it weights your portfolio too heavily toward a sector.

Nerves come into play based on your confidence in investment companies.

Many people try to apply banking rules to funds. In banking, the Federal Deposit Insurance Corp. protects up to $100,000 of your deposits in the event of a bank failure.

In stocks and funds, the Securities Investor Protection Corp. (SIPC) insures the securities and cash held by brokerage firms against the failure of those companies (up to $500,000 per account, depending on the circumstances).

SIPC does not protect investors against market risk and downturns, only against the insolvency of the brokerage house. Some of the fund supermarkets and brokerage firms offer additional protection to the SIPC coverage.

Because SIPC does not cover market downturns, many investors inject fear into the process. When they see big numbers in an account -- usually something above the $100,000 level associated with FDIC bank account coverage -- they get worried. Rather than expanding their holdings in a fund, they buy new funds.

They are not necessarily fearful of market risk -- the chance of losing money based on market fluctuations -- because if they were, they would pull money out of stock funds and into cash.

Instead, they fear "manager risk," by which too much of their future is in the hands of one company, being run in one management style.

"If you are nervous and add funds, you are diversifying and spreading risk, but you also may be diluting performance," says Holly Hooper-Fournier, co-editor of the Mutual Fund Strategist newsletter. "Adding funds isn't necessary, but neither is living with the fear that you have too much in a single fund."

The type of fund and the fund family involved also play a part in the decision. Experts agree it's foolish to buy virtually identical index funds to have offerings from different companies, yet they caution against having too much money tied up in tiny boutique firms or in small funds in niche markets.

Says John Rekenthaler, director of research at Morningstar Inc.: "I would be more worried if my money made up 10 percent of a fund than if a fund made up 10 percent of my portfolio."

The big test for how much money to hold in an individual fund may be the personal barometer reading you get in market conditions that make the Coney Island roller coaster seem tame.

Notes Roy Weitz of the Web site: "If you are worried that you have too much money tied up in one fund, you probably do. Yes, too many funds may hurt your returns, but that's better than losing sleep at night over this."

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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