Conventional investing wisdom is that that putting their money into a range of different funds can help investors spread their risk.
That’s because if you invest into several different types of asset, as well as different geographical areas, if one of these assets or regions underperforms, hopefully some of your other investments will perform better, helping compensate for any losses.
Remember, however, that no matter how much you diversify your investments, they could still fall in value and you could get back less than you invest.
Knowing exactly how many funds you should hold in your portfolio isn’t always easy. Here, we explain why there’s no ‘magic number’ of funds to hold, and how there are funds available that can provide a single solution for investors seeking diversification.
Understand what you are investing in
When assessing whether you have the ‘right’ number of funds in your portfolio, the key point to consider is whether the number you hold can help you achieve your desired results, based on your approach to risk, and the time period you’re investing over.
For example, if you are comfortable accepting a high level of risk in return for potentially higher growth, you may decide to allocate more money into funds investing in shares. If you prefer to focus on lower-risk investments, you may want to include more funds that invest in bonds and gilts, which are bonds issued by the UK government.
Remember that investments should be held for at least five years, but preferably longer. They can fall as well as rise in value, so there’s the risk you could get back less than you put in.
Some funds focus on a specific geographical area, type of investment or sector. Others are more general and invest across several regions and sectors. Each fund typically holds dozens of underlying investments. If, for example, you invest in 20 different funds, you could be holding as many as 1,000 different stocks, and there’s a risk that you could be duplicating some of your investments.
You can find out more about each fund’s objectives, and risk and reward profile from the fund’s key investor information document (KIID), which you must read before you invest. If you hold several funds with the same investment objective and similar holdings, your portfolio may be overly concentrated or ‘overweight’ in one particular area, and you may want to consider rebalancing it. Remember, diversification comes from spreading your money across many different underlying investments, and not just by holding multiple funds.
Understanding when you have too many funds
While it’s important to make sure your portfolio is properly diversified, having too many funds can make it difficult to keep track of your investments.
You should therefore only keep as many funds in your portfolio as you’re comfortable monitoring. For example, if you hold 10 or 20 different funds, you’ll need to keep a close eye on the changing value of all these investments to make sure your asset allocation still matches your investment goals. If your time is limited, you may find it easier to keep an eye on the performance of a smaller number of funds.
It’s also important to remember that when parts of your portfolio perform strongly, they’ll become a larger part of your asset allocation, which means your asset mix can change.
If this happens, you may need to rebalance your portfolio and make changes so that the funds you hold have a chance of meeting your objectives.
Learn more about the importance of managing your portfolio
Remember that no matter how you tweak your holdings, investments still carry risk. They can fall in value as well as rise and you may get back less than you invest.
How multi-asset funds may help
A multi-asset fund can provide a single solution for investors looking for diversification but who perhaps aren’t comfortable monitoring several different funds themselves, or who might not have the time.
As the name suggests, a multi-asset fund invests in a range of different assets, with the fund manager responsible for getting the balance of investments. There are different types of multi-asset funds, which have different investment objectives. The right variety of asset mix for you will depend on your attitude to risk. For example, if you have a strong appetite for risk, you may decide to invest in multi-asset fund with a higher proportion invested in shares than other assets, whereas if you are more cautious, you may prefer a multi-asset fund with a lower proportion in shares.
Taking on more risk can mean potentially higher returns but there’s also a greater chance of losing money. On the other hand, less risky investments may provide you with more secure returns (albeit that they too can still fall in value), but these are likely to be lower.
Multi-asset funds may be multi manager funds, which build a portfolio of different funds run by other managers. This gives the benefit of the manager’s investment decisions, but charges will usually be higher.
Again, you can find out the key features of these funds from their KIIDs.
Find out more about multi-asset funds
If you’re unsure where to invest, seek professional financial advice.
As a seasoned financial expert with extensive knowledge in investment strategies, let's delve into the concepts discussed in the article and provide additional insights:
Diversification as a Risk Management Strategy:
The article emphasizes the conventional wisdom of spreading investments across various funds to manage risk effectively. Diversification involves investing in different types of assets and across different geographical areas. The logic is that if one investment underperforms, others may compensate for potential losses.
Expert Insight:
Diversification is indeed a fundamental principle in risk management. By spreading investments, you aim to mitigate the impact of poor performance in any single asset or region.
No 'Magic Number' for Funds:
The article rightly points out that there is no universally applicable "magic number" of funds to hold in a portfolio. The optimal number depends on individual factors such as risk tolerance, investment goals, and time horizon.
Expert Insight:
Investors should assess their risk tolerance and investment objectives to determine the right balance of assets in their portfolio. This personalized approach is crucial for long-term success.
Understanding Your Investments:
The article stresses the importance of understanding the investments in your portfolio. It suggests aligning the number of funds with your risk tolerance and investment horizon. Additionally, it highlights the significance of assessing the objectives and risk profiles of each fund through key investor information documents (KIIDs).
Expert Insight:
Investors must conduct thorough research on each fund, considering factors like investment goals, risk levels, and historical performance. This knowledge forms the foundation for informed decision-making.
Risks of Over-Diversification:
The article warns against over-diversification, which may occur when holding too many funds. Overlapping investments across multiple funds might lead to unintended concentration in certain areas, potentially exposing the portfolio to unnecessary risks.
Expert Insight:
While diversification is crucial, overdoing it can dilute the benefits. Investors should be cautious about redundancy in their holdings and regularly assess if their portfolio aligns with their investment strategy.
Importance of Portfolio Management:
The article underscores the necessity of actively managing a portfolio. Monitoring the performance of each fund is crucial for ensuring that the asset allocation aligns with the investor's goals. Rebalancing may be necessary to adjust the portfolio when certain assets outperform others.
Expert Insight:
Successful portfolio management involves continuous monitoring and occasional rebalancing. Investors should stay informed about market trends and be prepared to make adjustments as needed.
Multi-Asset Funds as a Solution:
The article introduces multi-asset funds as a comprehensive solution for investors seeking diversification without actively managing multiple funds. These funds invest in a variety of assets, and the fund manager takes responsibility for maintaining the right balance.
Expert Insight:
Multi-asset funds can be suitable for investors who prefer a hands-off approach. However, investors should carefully consider the fund's objectives, asset mix, and associated fees before investing.
Professional Financial Advice:
The article wisely suggests seeking professional financial advice for those unsure about where to invest.
Expert Insight:
Consulting with a financial advisor can provide personalized guidance based on individual financial situations and goals, ensuring a well-informed and tailored investment strategy.
In conclusion, successful investing involves a nuanced understanding of risk, diversification, and ongoing portfolio management. Investors should approach their portfolio with a strategic mindset, aligning their choices with their risk tolerance and long-term objectives.
