How much is too much in one fund?

[disneysteve]

I often hear that you shouldn't have more than 10% of your portfolio in any single stock. But what about a mutual fund. Since a fund is a diversified investment by design, how much is too much to have in one fund? We have one fund that has had a very good run over the past few years. It now represents nearly 20% of our portfolio, even though we have stopped adding new money to the account and I sold off the shares held in my IRA to reduce my exposure a bit. The fund contineus to do very well. Should I just leave it be? The percentage it represents is gradually decreasing since we don't add to it anymore so new money goes into other funds.

[vsjhoc]

Re: How much is too much in one fund?

Steve - To quote the Beatles, let it be. I think you're wise (as usual) to let the fund decrease rather than increase its percentage of your portfolio. You'd be contravening the no-more-than-10%-of-your-total-portfolio stock guideline only if your mutual fund had one stock that represented more than 50% of its (the mutual fund's) own total holdings -- which is highly unlikely.

On the other hand, if the fund is your super-duper health fund you have mentioned that has been achieving those sky high returns, it all depends on your risk tolerance. (Did you seen Jeffrey's blog about the various tests to assess your tolerance? Although I think you personally already have a good idea of how much you're willing to play on the wheel of fortune.)

[kv968]

Re: How much is too much in one fund?

Well Steve I would have to ask what type of fund is it? If it's a small-cap, an int'l, a REIT, etc...then yes you can hold too much of it. If it's however an S&P 500 index stock or a total market index then I don't think you can hold too much. You would still want to diversify, which I'm sure you do, but there wouldn't be such a thing as "too much" for a fund like that.

[disneysteve]

Re: How much is too much in one fund?

Well Steve I would have to ask what type of fund is it?

It is a small cap value fund. Performance numbers are:
1 year: 26.17
3 year: 12.88
5 year: 17.49
10 year: 14.55
20 year: 14.62

So you can see why I wouldn't be in a hurry to sell any of my holdings with that kind of long-term track record. I think I've been in the fund about 10 years or so (I'm at work and don't have that info here).

[vsjhoc]

Re: How much is too much in one fund?

Well then to quote another song, "oh, won't you staaaay ... just a little bit longer?"

[kv968]

Re: How much is too much in one fund?

Well then to quote another song, "oh, won't you staaaay ... just a little bit longer?"

Then to quote another song to answer yours,"no, no, no, no no no no no no..."

This is where the tricky question of rebalancing comes in. Do you have a set allocation plan? If so, how far out of range does it have to become before you set it back to the original? And, after all that, when do you pull the trigger and actually do it? It's hard to do when things are going good but things can turn bad pretty quickly.

I'm in the same quandary as you. I'm trying to get all of investments into an allocation that I like but it's hard to move some of them when they're doing so good but I'm doing it slowly as to ease the pain.

My opinion? Since it's small-cap, you stopped putting money into it and it's 20% of your portfolio I'd say just leave it. Depending of course that the majority of the rest of your portfolio isn't too risky. If however it does so good that it starts creeping up to 25-30% then I'd "take a little off the top".

[Broken Arrow]

Re: How much is too much in one fund?

Well, this is all just my personal opinion, and you know what they say about that.

I believe that you have a pretty good idea on your risk tolerance and what you want your portfolio to look like. If so, the percentage of this mutual fund should reflect that risk tolerance and asset allocation you have determined for yourself.

Seeing as how a mutual fund is usually somewhat diversified to begin with, I don't see anything wrong with having 20% or even more. Again, so long as it fits into the general asset allocation picture that you have in mind.

[disneysteve]

Re: How much is too much in one fund?

I'm in the same quandary as you. I'm trying to get all of investments into an allocation that I like but it's hard to move some of them when they're doing so good but I'm doing it slowly as to ease the pain.

My opinion? Since it's small-cap, you stopped putting money into it and it's 20% of your portfolio I'd say just leave it. Depending of course that the majority of the rest of your portfolio isn't too risky.

This pretty much is my feeling. As I said, I've stopped contributing to it and I did sell some of my holdings held in a different account. I'd rather let it drift down a bit that way since the bulk of the fund is held in a taxable account. I'd rather not sell shares and generate a taxable gain if I don't need to.

[kv968]

Re: How much is too much in one fund?

You should maybe try to hold future small-cap funds in a tax-deferred fund if you can. That way you won't have to worry too much about the capital gains. Although with the year funds are having this year, everything is getting hit with a hefty capital gain declaration. I know a couple of my funds (unfortunately taxable) just got hit with a 7.5% payout.

[disneysteve]

Re: How much is too much in one fund?

You should maybe try to hold future small-cap funds in a tax-deferred fund if you can.

Until 2 months ago, our only tax-deferred retirement accounts were our Roths, so we were limited to $4,000/year each. Since we invest a lot more than that annually, much of it has gone into taxable accounts. Going forward, however, we now put $1,250/month into my wife's 403b so a lot less will be invested in taxable accounts. And the IRA limits will start gradually rising in 2008, so that will help too.

Right now, about 59% of our money is held in taxable accounts, but thanks mainly to the 403b, that number will be coming down steadily over the coming months.

[kv968]

Re: How much is too much in one fund?

Right now, about 59% of our money is held in taxable accounts, but thanks mainly to the 403b, that number will be coming down steadily over the coming months.

That's good because you've got to be getting eaten up with taxes. Ah, but at least you're saving, that's the important thing.

If you don't mind me asking, are you contributing anymore into your taxable accounts or is everything that would be designated for that now going into your wife's 403b? You don't have access to a 403b yourself?

[disneysteve]

Re: How much is too much in one fund?

If you don't mind me asking, are you contributing anymore into your taxable accounts or is everything that would be designated for that now going into your wife's 403b? You don't have access to a 403b yourself?

I'm not positive yet, but probably the taxable contributions will stop, replaced by the 403b contributions. I have to wait and see how the numbers play out as the year goes on. If I have extra money, I may put it toward our HEL rather than investment accounts.

I have no employer-sponsored plan at my job.

[scfr]

Re: How much is too much in one fund?

I'm gonna swim against the tide here and say that, yea, maybe you do have a bit too much in small caps.

Have you ever used the Morningstar X-Ray tool (it's free). You enter all of the funds you own and it gives you a stock style diversification break-down: Large/Med/Small and Value/Core/Growth. It will also tell you what percentage of your portfolio is in different business sectors. It's a pretty cool tool.

We shoot for about 70% Large, 20 +/-% Medium, and 10% +/- Small, spread out fairly evenly among Value/Core/Growth. That's why I say you may be a bit heavy on Small stocks.

I think you and I about the same age, but I think I'm less of a risk taker.

Edit - Here's the link to the Morningstar X-Ray:

http://portfolio.morningstar.com/NewPort/Free/InstantXRayDEntry.aspx?tsection=toolsxray&dt=0.7055475

[kv968]

Re: How much is too much in one fund?

I'm gonna swim against the tide here and say that, yea, maybe you do have a bit too much in small caps.

Nothing wrong with swimming against the tide. If you're uncomfortable with the risk involved with small-caps (or any riskier sector for that matter) then you should lessen your load in that area. Afterall, if you're not comfortable with your portfolio you're bound to always tinker with it and that's probably not for the best. And besides, you have to be able to sleep at night without worrying about it.

[disneysteve]

Re: How much is too much in one fund?

Nothing wrong with swimming against the tide. If you're uncomfortable with the risk involved with small-caps (or any riskier sector for that matter) then you should lessen your load in that area.

Absolutely. Everyone's situation is different. Everyone's risk tolerance is different. As a result, everyone's asset allocation may be different.