Dos and Don'ts for Combatting Portfolio Sprawl

Is a portfolio clean-up on your 2015 to-do list? Here's some top advice on getting rid of the right stuff

Christine Benz 14 January, 2015 | 9:30AM
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Just as we tend to accumulate more toys, furniture and knick-knacks than they know what do with, many investors have a similar glut of "stuff" in their portfolios. For every single portfolio I see that's whippet-thin—without an excess stock, fund or ETF to spare—I come across 10 more that have 50, 60, or even 100 individual holdings.

Of course, in the scheme of investor problems, over-diversification isn't the worst sin. Having too many holdings won't wreak the same havoc that under-saving will, or overpaying, or performance-chasing. But portfolio sprawl can add to investors' oversight challenges. It can simply be difficult to keep track of the fundamentals of so many holdings, especially if those holdings include individual stocks or actively-managed funds. The investor with too many holdings may have trouble figuring out their asset allocations or knowing when or how to rebalance. Having too many stocks and funds can also compound the headaches for an investor's successors. Widows, widowers and other loved ones may have difficulty untangling the web of the too-acquisitive investor.

Portfolio sprawl can also have negative repercussions for performance. If an investor amasses a lot of holdings, especially multiple diversified equity and bond funds, their performance within each asset class can become very index-like very quickly. But if that same investor is paying active management fees, sales charges or some combination thereof, the portfolio may well underperform a buy-and-hold portfolio consisting of simple index funds with ultralow costs.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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