Don’t overload your portfolio with too many funds

Many investors for years relied heavily on actively managed mutual funds to do their “heavy lifting.” A while back, the consensus held that if a fund family consistently beat its benchmarks, this, together with some diversification across sectors, could over time help keep the investor ahead of the market. Alas, precisely in the name of diversification many investors find themselves on the brink of retirement with an unmanageable hodgepodge of funds, whose hot names have long since gone.  

One big issue that comes with holding too many funds: it becomes far more difficult to stay abreast of developments in each fund and family. Much like holding too many stocks, investing in too many funds and families can create a burden on one’s time—but often without the benefit of extra diversification. One can miss flagging performance, or even big events like the sudden departure, death or retirement of a manager or a fund merger that changes the fund’s purpose and direction.

Another: while it’s a good idea to have holdings in many sectors and investment styles, holding too many funds can ultimately cause one’s investments to work at cross purposes to each other.

A third issue compounds all of the above: consider the number of diverse fund family and fund statements one must juggle at tax time.

The same problem—too many funds in too many fund families or securities houses—can also greatly complicate the job of an executor or heir if an investor becomes ill or dies. Imagine them having to scramble around merely to locate all your assets, and needing to repeat the process in order to obtain probate court approval for each and every transfer or sale required from your mass of accounts.

For years, a major roadblock reinforced the urge not to consolidate mutual fund holdings under one roof, despite the many conveniences of doing so; one’s cost basis for mutual fund shares did not migrate with the assets. Unless an investor had maintained scrupulous records of the original and cumulative cost basis of all shares bought over time, he or she could theoretically face a huge IRS tax bill for the entire investment.

That “reason,” however, no longer exists. One has no excuse not to move all one’s funds to a central account. In 2011, a 2008 tax law caught up with mutual funds. Now, the law requires that all advisers, securities and fund companies transfer a client’s cost basis in fund shares within 15 days of any account transfer. A reciprocal practice then took effect to protect the industry from potential fines of up to $350,000 annually per institution for collective incorrect 1099-B reports of fund cost basis. Investors hence gained big time.

After you move your funds to one stronghold, however, take stock of all the funds you own. Make sure that you genuinely need them all.

We don’t necessarily recommend that you take such an extreme measure as to own only one multi-class, multi-region, multi-capitalization fund solely to trim the number of funds in your portfolio. But neither do you need dozens of funds.

Apart from higher potential for chaos, too many funds can incur excessive trading fees, since the big brokerage firms often charge fees to trade many popular mutual funds. Regardless of the fee level, having fewer funds will likely save you and your loved ones a lot of headaches.