How much is too much in one mutual fund/ETF?

[disneysteve]

I've often read that you shouldn't have more than 10% of your portfolio in a single stock but what about a mutual fund or ETF? Since those are generally broadly diversified, is there any rule of thumb about those? What if it's a sector fund like commodities or energy or health care? Then what? Does the 10% rule still apply?

[Jluke]

I'll try, but no means an expert, so here are my thoughts from what I've read...

if you have a fund that is 5% or less of your total investments, then it is not really worth being in that fund as it cannot really "move the needle" on your investment dollars.

10% is a suggestion for individual stock and probably would include funds that are not diversified enough (sector funds).

If you know of the 3-fund portfolio, that would suggest something like 40% in Total US Stock fund, 20% Total International and 40% in Total Bonds... so that shows more than 10% is "acceptable"

guessing you're thinking about VGHCX among others...

Vanguard Wellesley is at about 33% of my total investments...

[Petunia 100]

100% is fine, if the fund/etf is diverse enough.

[Fishindude77]

I don't think it matters. Any good Mutual fund is highly diversified anyway. It's not the same as having a whole bunch of money concentrated in shares of stock of one company.

[disneysteve]

I don't think it matters. Any good Mutual fund is highly diversified anyway. It's not the same as having a whole bunch of money concentrated in shares of stock of one company.

True, but what about concentration in one industry. A sector fund may only hold 50-75 stocks all in the same field. Do you think that matters?

[corn18]

True, but what about concentration in one industry. A sector fund may only hold 50-75 stocks all in the same field. Do you think that matters?

That does matter. You could set up a 3 fund portfolio with total U.S. stock, total international stock, and total bond. That shouldn't be subject to a sector specific issue (up or down).

But then you can tilt towards tech, energy, health care or value via funds or ETF's. Just like with stocks, if you tilt too much you take on risk (and opportunity).

DS, I think you are heavily tilted towards health care right now in a mutual fund. That's fine, but if it gets higher than 10% of your total portfolio, I think you need to evaluate the risk you are taking. Obviously it has been very good for you.

Tom

[disneysteve]

That does matter. You could set up a 3 fund portfolio with total U.S. stock, total international stock, and total bond. That shouldn't be subject to a sector specific issue (up or down).

But then you can tilt towards tech, energy, health care or value via funds or ETF's. Just like with stocks, if you tilt too much you take on risk (and opportunity).

DS, I think you are heavily tilted towards health care right now in a mutual fund. That's fine, but if it gets higher than 10% of your total portfolio, I think you need to evaluate the risk you are taking. Obviously it has been very good for you.

Tom

I need to run the numbers but a rough calculation has it at about 14% which is what made me pose the question. I may want to direct new money elsewhere to bring that % down a little.

[james.hendrickson]

Actually, this is a very good point. Some actively managed mutual funds can have up to a third or a half of their equity in a single company. If the performance of that company is very poor, the fund's shares will be impacted accordingly.

A lot of aggressive growth banking funds in the 2000s were heavily invested in Washington Mutual shares before the company went bankrupt.

[kork13]

I need to run the numbers but a rough calculation has it at about 14% which is what made me pose the question. I may want to direct new money elsewhere to bring that % down a little.

A related consideration for you specifically, Steve... Just like we all tell people not to hold too much company stock (in the company you work for), it wouldn't be advisable to focus too much into a sector fund for the sector that you work in. If you work in healthcare or tech or real estate, and that sector takes a nosedive, you could be out both your job and your investments.

The rule of thumb I've always heard is to keep any individual stock to no more than 5% of your portfolio, and I'd go with about the same (*maybe* 10%) for a particular sector fund.

[TexasHusker]

I've often read that you shouldn't have more than 10% of your portfolio in a single stock but what about a mutual fund or ETF? Since those are generally broadly diversified, is there any rule of thumb about those? What if it's a sector fund like commodities or energy or health care? Then what? Does the 10% rule still apply?

Not in my opinion, because a mutual fund has diversified your investments by definition.

A fund such as Dodge and Cox Income has a consistent, stodgy return, and is very well diversified: Cash, bonds, treasuries, consumer staples, technology, foreign, and even some energy and precious metals!

[colby99]

I believe it depends on the ETF itself and how specific that ETF is. For example having all of your money in the Vanguard Total Stock Market Index Fund isn't the worst idea (in regards to volatility). But having all of your money in a sector specific ETF wouldn't be the best confidence IMHO.

[disneysteve]

Not in my opinion, because a mutual fund has diversified your investments by definition.

But what if it is a narrowly-focused fund? VGHAX only holds 75 stocks and the top ten make up over 40% of assets.

having all of your money in a sector specific ETF wouldn't be the best confidence IMHO.

Right, so how much is too much? 10%? More? Less?

[TexasHusker]

But what if it is a narrowly-focused fund? VGHAX only holds 75 stocks and the top ten make up over 40% of assets.

Right, so how much is too much? 10%? More? Less?

A sector fund is a different animal. Yes, it's diversified, but diversified within a specific sector: Energy, technology, precious metals, etc.

You could own 10 different sector funds and accomplish the same as Dodge and Cox Income. Or maybe not. They are paid to do this, so I would hope they would be more proficient at choosing equities than yours truly.

I've found this often isn't the case, which is why I became disillusioned and walked away from equities entirely. But that's another topic.

[amarowsky]

I think it's fine to have much more than 10% in a diversified fund (i.e an index fund).

I am re-balancing my primary taxable account to the point that it is at least 60% SP500 in the form of SPY (etf).

As for my retirement stuff it's all pretty true to the 60/20/20 passive investment strategy. Some slight anomalies.

[scfr]

Right, so how much is too much? 10%? More? Less?

What percentage were you comfortable with when you first invested with this fund? Do you think your reasoning was sound? Has anything about your investment strategy or style changed since then?