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do). Never has a column brought in so many responses as the one two
weeks ago. Some of you simply made the typical derogatory comments. However, many of
you asked good follow-up questions. Here is a sampling:
Do your recommendations for the number of funds required
for good asset allocation apply to all sizes of portfolios, such as $1,000,000?
Yes, the recommendation to hold one or two funds per asset
class is just as critical for large portfolios as for smaller ones.
Originally I invested 70% of my money in an S&P 500
index fund and 30% in an active growth fund, which is 65% invested in high tech stocks.
Recently the growth fund has had excellent performance, so I moved all of my money into
it. Would this meet your approval with respect to fitting the "single active
fund" profile?
It's very important to keep my remarks in perspective. I
did not say invest in one single active fund. I said invest in one single active fund per
asset class. I must ask you, where are your small-cap investments, your international
investments, your value stocks? You basically have staked all of your retirement nest egg
on a solitary factor -- that large company high technology stocks will outperform the
market. Now they very well may. But just because they have in the past is no reason to
suggest that they will in the future. What if they don't outperform the market? What if
the high tech sector falls while the rest of the market rises? It has happened before. In
fact, it happened this past week! Then you will suffer a much poorer nest egg than you
would have had with a broadly diversified portfolio. The most important aspect of an
investing strategy is to have broad diversification across several asset classes.
Your comment about picking more than one
"active" fund in a grouping seemed a bit lame -- if one is going to do enough
homework to find one fund in a grouping, finding a second or third is not that much more
work. Whatever factors one uses to choose a fund, there are nearly always 2 to 5 funds
that bubble up to the top. Then if you look very closely and find that they are not
holding the same stocks, then why not go with all of them?
Now all of the "Kafý" audience can see the love
I generate from their fellow readers. I'll assume the writer transposed a couple letters,
and when he wrote "lame," he really meant "male," implying that
singularity of focus is a masculine trait.
Or perhaps not.
In any case, the key issue has nothing to do with putting
in a lot of work. If you feel the process you have is a valid one, the "work"
pales in comparison to the gain. Of course, that's easy for me to say, since I have over
20 analysts doing the work (while I spend my time reading snippy e-mails). The key issue
is how much you want to pay in fees.
Suppose I find four funds that benchmark themselves to the
S&P 500 that I think have superior performance. Let's say each fund holds 70 stocks
(the typical number of holdings for large-cap funds) that are mainly unique from each
other. If I buy all 4, I am now holding a portfolio of 280 large-cap stocks. What is the
likelihood that they will have significantly different performance than the 500 large-cap
stocks in the index? The likelihood of this occurring isn't very high. Yet I will incur
the added expense of using actively managed funds. Again, for that reason, I think you
should either use an index fund to cover an asset class, or use no more than one or two
active managers.
This ends our discussion about how many funds is the
correct number…unless someone with disassociative identity disorder writes me on this
issue. Then I can answer using the title "Who Wants to Marry a Multi-Persona
Multi-Fund Allocator?"
A Request
I get a lot of "get rich quick" ideas e-mailed to
me. But I would like to hear from those of you who have gotten rich slowly. Specifically,
please e-mail me if you satisfy the following criteria.
- You have been investing in a 401k plan or other deferred
retirement plan, such as a 403(b) for at least 10 years -- sorry, no newbies.
- You believe you have been a successful investor.
- You would be willing to share specifics (funds you have
used, dollars you have invested, the current balance in your plan).
What I want to do is share with our readers some stories of
successful investors. I won't use your name unless you want me to, and I will show you the
reference first.
So please respond with your story to: scott@mpower.com. And what's in it for you? The person
with the best story gets a Ricky Martin CD in almost mint condition. It will be sent to
you as soon as I can sneak into my daughter's room.
 Lummer's Logic Archives
Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment
Officer, is a recognized expert in the investment field. He has conducted extensive
research on asset allocation, international investing, risk management, mutual fund
analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook.
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