The Danger Lurking in Your Portfolio

Your portfolio may be less diversified, and therefore more at-risk, than you think.

Mutual funds can be terrific, conveniently parking you in dozens or hundreds of stocks. But having a bunch of funds in your portfolio won’t automatically make you more diversified. If you own too many of the same general type of mutual fund, you’ll likely have a more concentrated portfolio than you think — and possibly some big gaps in your asset allocation.

For example, consider these three different funds: The Vanguard US Growth Fund (ticker: VWUSX) invests in U.S. companies with promising growth prospects. The Fidelity Select Technology Fund (FSPTX) focuses on the technology sector. The California Investment Nasdaq 100 Index (NASDX) is an index fund tracking the performance of the Nasdaq 100. It may seem that each of these funds would serve a different purpose in a portfolio.

But when you look closely at each one’s top five holdings, you’ll notice something peculiar: There’s a lot of overlap. Last time we checked, Apple, Qualcomm and Google were in all three, while Hewlett-Packard, Microsoft and Gilead Sciences were in two. (Google, Apple and Microsoft have been recommended in Motley Fool investment newsletters.)

Of course, more experienced investors might realize that the Nasdaq is made up largely of technology stocks and that most tech stocks fall into the growth category. And of course, the Vanguard fund has plenty of non-tech companies further down the list. But without checking your holdings, you may end up with a false sense of security — when in reality, you’re dangerously overinvested in technology or some other sectors.

Similarly, you’ll find that the top holdings in many large-cap stock funds closely resemble those of the S&P 500 index — which is problematic, if you’re paying 1 to 2 percent per year for a managed fund when you could be paying a tenth of that for an S&P 500 index fund.

Luckily, once you start looking, it’s not difficult to get plenty of information about mutual funds. Perhaps start by looking up funds of interest at Morningstar.com. 