How much to hold in any one fund

aroominyork

I am interested in some views on the minimum/maximum people hold in any one fund/IT and what factors affect their decisions within different sectors or at different times in their lives or in the economic/investment cycle? I theoretically invest within a 4% to 10% range but occasionally (still being in the early months of DIY investing and trying to settle on a portfolio to stop tinkering with) am tempted to go higher and then have to pull myself back.

bostonerimus

It depends on the diversification of the fund and your asset allocation philosophy. I invest in broad indexes and have 50% of my assets in a single US equity Index fund and then 25% in an global equity fund ex US and another 25% in a US bond index fund.

aroominyork

bostonerimus wrote: »

It depends on the diversification of the fund and your asset allocation philosophy. I invest in broad indexes and have 50% of my assets in a single US equity Index fund and then 25% in an global equity fund ex US and another 25% in a US bond index fund.

I should have seen that coming (which I don't mean facetiously - your views have been helpful to me; I am comparing my portfolio's changes to VLS and in time will decide whether to switch to VLS). So to clarify I am referring to individual active funds, not index funds. It is exactly people's asset allocation philosophies and approaches I am interested in.

Linton

The amount I hold in any one active fund is that required to get close to my desired overall asset allocation in terms of geography, company size, industry sectors, etc. So in theory, if there was a manager who thought exactly like me, one fund would be enough. In practice about 10-15 are sufficient. No holding is above 20%. Any holding below 5% needs to be questioned and any one below about 2% wont make enough difference to be worth the effort. The funds held in small %s are focussed on a particular sector or other small market.

aroominyork

Linton wrote: »

So in theory, if there was a manager who thought exactly like me, one fund would be enough.

Really? Don't you see one element of diversification as not relying on a single investment manager's stock/bond/sub-sector picking judgement?

Linton

aroominyork wrote: »

Really? Don't you see one element of diversification as not relying on a single investment manager's stock picking judgement?

I don’t really believe that fund managers have mystic stock picking powers at the individual share level. The well known successful managers are those whose investment allocation style happens to work well in particular markets for extended periods of time. When economic circumstances change significantly their apparent skills tend to be less effective.

And if one did believe in stock picking, diversifying widely in it within particular markets doesn’t make sense as one would end up with tracker-like overall allocations. If there were several managers who did seem to be unusually successful I may use them to meet my allocation requirements in different markets. eg use Fundsmith for the US and Woodford for the UK. However almost by definition unusually successful managers tend not to be well diversified.

Malthusian

aroominyork wrote: »

So to clarify I am referring to individual active funds, not index funds.

It's got nothing to do with active v passive but the diversification of the fund.

Something like Vanguard LifeStrategy which takes both equities and bonds, invests over several geographical sectors within each asset class, and invests in pretty much all the available securities within those sectors, could be held as an entire portfolio by pretty much anyone. It's not perfect but it is unlikely to create permanet losses or severely underperform.

And there's no reason you can't have an active fund just as diversified as Vanguard LifeStrategy. It would probably have to be a multi-manager fund (as a single manager can't be expected to monitor thousands of shares) and therefore expensive, but if you believe in active management there's no reason one manager can't pick a multi-asset range of diversified active funds and achieve similar diversification - while in theory removing the duds that Vanguard invests in automatically.

Conversely if you are investing in a Croatian mining smaller companies ETF or an active fund with the word "Select" in the name then the diversification will by design be almost nil, and both the active and the passive fund will be designed to be held in only a small proportion - 10% at most unless you're a gambler - to complement a larger portfolio.

So it's a how long is a piece of string question. The maximum you want to hold in any fund depends on how diverse it is, and in turn on how much time you want to spend juggling obscure funds in your portfolio.

DiggerUK

“Diverse portfolio” is an excellent piece of management speak, being both meaningless and eye catching.
It doesn’t matter which funds or geographical areas are chosen, the near complete meshing of the worlds economic activities results in all ‘fortunes’ going up and down with the tides of boom and bust. No amount of diversification can stop that affecting your hard earned.

My evidence for that is unchallengeable, let’s start with 2007 and work back in time. Now let’s go from today’s booming (and bubbling?) diverse portfolios....yes, there seems to be legs on this boom still to run; but the belief that a diverse allocation in a sexed up portfolio will protect your hard earned forever is just herd talk..._

Linton

DiggerUK wrote: »

“Diverse portfolio” is an excellent piece of management speak, being both meaningless and eye catching.
It doesn’t matter which funds or geographical areas are chosen, the near complete meshing of the worlds economic activities results in all ‘fortunes’ going up and down with the tides of boom and bust. No amount of diversification can stop that affecting your hard earned.

My evidence for that is unchallengeable, let’s start with 2007 and work back in time. Now let’s go from today’s booming (and bubbling?) diverse portfolios....yes, there seems to be legs on this boom still to run; but the belief that a diverse allocation in a sexed up portfolio will protect your hard earned forever is just herd talk..._

Having a diverse equity portfolio wont protect you completely from major global collapses though it will help a bit in protection from worst cases - in the 2008/9 crash Asia/Pac dropped nearly 50%, the FSE 100 dropped over 40% and the FTSE world about 37%. Diversification will protect you from local events and enable you to gain from unexpected rises in particular sectors. Much better than putting all your money on one area such as e-businesses in 2000 or gold at any time.

ColdIron

DiggerUK wrote: »

It doesn’t matter which funds or geographical areas are chosen, the near complete meshing of the worlds economic activities results in all ‘fortunes’ going up and down with the tides of boom and bust.

Well you could check out BlackRock Gold and General and compare it to, well just about anything else, but let's go with the S&P500. Over the last 5 years one of them is 31% down and the other 138% up. I think that matters

No amount of diversification can stop that affecting your hard earned.

I'd suggest that diversifying away from that BlackRock gold fund to any degree at all would stop it affecting your hard earned. I think that matters too

BananaRepublic

ColdIron wrote: »

Well you could check out BlackRock Gold and General and compare it to, well just about anything else, but let's go with the S&P500. Over the last 5 years one of them is 31% down and the other 138% up. I think that matters

I'd suggest that diversifying away from that BlackRock gold fund to any degree at all would stop it affecting your hard earned. I think that matters too

That's nothing to do with diversification, it's just a very bad fund. Anyone who had done their research would have seen that it was carp over 1, 3, 5 and 10 years, and not touched it with the proverbial barge pole.

But there is a serious point here, which is that if you do go with active funds, then it does make sense to not invest all of your eggs in the one basket. I hold many UK active funds, and many European active funds. Thus far the managers have earned their Porsches and Patek Philippe watches, but there is some variation, and diversification does protect one from a manager losing his mojo. I would argue that for passive funds that track a single index, diversification within that index is not needed, but of course diversification over indexes/countries is advisable. All pretty obvious stuff really.