How many funds in the “perfect” portfolio?
Posted by: Brian Dennehy
Of course, it is not just how many funds, but how many holdings overall if you also have individual stocks. We get a steady stream of emails asking that question in one form or another, and we touched on this most recently in the Q&A in our September Teleconference. Here’s a quick run-down of our thoughts.
Our short answer is: 15 maximum
The longer answer is that it depends.
If you have a portfolio of funds spread across asset classes – something like our Age Guide Portfolio – perhaps you might have 15 funds. But with a different portfolio style you could get away with as few as 3 funds.
Just be clear that if your portfolio is 20+ an overhaul is definitely in order: you will be struggling to keep track of them all. In a situation when markets start tumbling there are simply too many decisions to make, fund by fund.
You must diversify. But there are limits
The main benefit of holding funds is diversification – not being unduly exposed to just one holding if it goes bust.
Imagine you had a discretionary portfolio (through a stock broker or bank) full of individual shares and bonds, rather than funds. You would probably have around 30 individual holdings, perhaps a bit more but not much.
In contrast, each individual fund in your portfolio will usually hold between 50-100 individual investments. Even if you held just 3 funds (an easy number to monitor), the total of underlying shares is probably 150-300 – that’s a lot of diversification.
Why not just 3 funds?
Why not indeed.
A significant proportion of our users focus largely on the UK stock market. In such a situation, there is absolutely no point in having 15 funds or anything close.
If you focus solely on stock markets, but also like an overseas exposure, this could stretch to 6 funds.
For example, you could combine our Dynamic UK Portfolio with the Dynamic World ex-UK Portfolio. This would give you 6 funds in total, 3 from the three main UK sectors and 3 from the main stock market sectors from around the world excluding the UK. This is our 50:50 portfolio, which you can see here.
To simplify things further you could follow our Dynamic Global portfolio, which selects the top 3 funds from the main stock market sectors including the UK.
What about a minimum amount per fund?
Let’s look at this another way. If you have a portfolio of £100,000, I would strongly recommend your minimum fund size is 5% of your portfolio, in this case £5,000. A holding any smaller size is simply not going to have a significant impact on your overall portfolio.
If you're investing larger sums should the number of funds increase alongside your portfolio value e.g. £1m in 10 funds and £2m in 20 funds? This doesn't make much difference and you get a huge amount of diversification from investing in funds.
We have advisory clients with £100,000 or more in individual funds as part of a larger portfolio. But do note that there are liquidity risks in certain funds and sectors, so do be aware of that when building your portfolio.
As always, keep your questions coming on this. Get in touch here.
ACTION FOR INVESTORS
There is no magic number of funds to hold in a portfolio...
...but 15 is enough to diversify across sectors...without becoming unwieldy.
And just 3 funds might be sufficient.
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