Asset Allocation: Know What Your Mutual Funds Hold


One of the most important decisions you will make when it comes to investing is to choose your portfolio’s asset allocation—its mix of equities, bonds, cash and other securities. Mutual funds can help some investors—including those with small portfolios—diversify their assets easily, but they may not be optimal securities for everyone. If mutual funds make up a significant part of your retirement portfolio, you should know the kinds of securities your mutual funds hold so you can understand your overall asset allocation and portfolio positioning.  

Financial markets are complex and constantly changing. Economic conditions, geopolitical risks and investor sentiment may influence market conditions. As a result, investment styles, sectors and countries tend to cycle in and out of favor, and different geographic regions, sectors and other categories may lead at different times. Understanding your mutual fund holdings can help you verify your asset allocation and portfolio strategy are set up appropriately based on your long-term investing goals and personal situation.

Diversifying Your Portfolio

You have probably heard about the importance of having a diversified portfolio. The adage “don’t put all your eggs in one basket” suggests investors should spread their investments across multiple countries, sectors and other areas of the market to reduce their portfolios’ exposure to any single area. But diversification can come in many different styles. So, what do we mean when we discuss diversification and how can you achieve it in your retirement portfolio?

While many people think diversification means holding a mix of asset classes or investment products, we believe investors can also achieve diversification by owning stocks or bonds that may react differently in various market scenarios. If your investment portfolio includes assets that are all in just one area of the market, your portfolio may benefit when that area is performing well. However, no one country, sector or equity style will remain positive forever and these categories often trade leadership. Diversification means understanding you could always be wrong. By owning some assets that will fare better when the broader markets don’t perform as you expected, you may be able to mitigate some portfolio volatility and risk.

Many investors believe their portfolios are diversified if they hold several mutual funds or exchange-traded funds (ETFs). But this thinking assumes all mutual funds hold different securities and that holding various funds makes you diversified. This belief can leave you vulnerable should you be wrong, and it exposes you to other potential portfolio management issues.

Mutual funds are popular investments in retirement plans, and you may find them in your employer sponsored retirement plans, IRAs, or Roth IRAs. Investing in these funds can help provide you with portfolio diversification, as you gain exposure to different types of markets without having to purchase individual, underlying assets. When you own several mutual funds, you need to understand what those mutual funds hold because they may contain similar securities or make conflicting trading decisions while you incur the costs.

Overlap and Duplication of Assets

Each fund can include hundreds to thousands of stocks or bonds, and owning too many mutual funds can actually leave you over-diversified. The concept of over-diversification doesn’t end with the number of stocks within a mutual fund. Holding multiple funds can also mean that you may hold the same security across multiple funds. This raises the possibility of over-concentration in certain sectors, styles or specific stocks and defeats the purpose of diversification.

You will often come across mutual funds with names such as balanced funds (sometimes referred to as asset allocation funds), small-cap equity funds, index funds, high-yield bond funds and so on. These names reveal the overall theme of the fund, which may make it easier to identify what area of the market a specific mutual fund focuses on. But the fund’s name doesn’t necessarily speak directly to its market outlook or portfolio positioning within those areas.

Lack of One Cohesive Strategy

Mutual fund managers each have their unique strategies, even those within the same organization. One manager may feel optimistic about a certain company, while another may have a negative outlook. In this scenario, one fund manager may be selling that underlying security while another is buying it—counterproductive for you.  Hence, you may end up paying the trade cost but for effectively no change in your portfolio holdings. Holding multiple funds may mean that you’re incurring excess costs or have a portfolio with no clear investment strategy, which may not be optimal to get you to your long-term goals.

Achieving Your Financial Goals

As an individual investor, you have goals for your portfolio and a personal situation that may vary from other investors, even those seemingly similar to you. While some mutual funds may aim to target a specific retirement date or track an index, these broad goals don’t include your specific time horizon, allocation preferences, life expectancy or income needs. Investors often overlook these specific goals that may have an impact on their optimal investment strategy.

Each investor’s situation is unique, and there isn’t a “one size fits all” approach. In a mutual fund, you are essentially an anonymous number in a pool of investors. Mutual funds typically lack personalization and all too often investors purchase several funds in an attempt to develop a strategy specific to their situation. Mutual funds may be appropriate for investors with smaller portfolios, but once you have built up a significant portfolio, there may be more efficient ways to achieve your goals.

How Fisher Investments Can Help

For investors with at least $500,000 in investible assets, it may be time for you to graduate to an investment strategy tailored to your specific goals and objectives. Fisher Investments may be able to build you a personalized global portfolio that consists of equities, fixed income holdings, cash or other securities. Contact us today or download one of our educational investing guides to learn more!

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.