You’re Violating Simple Rules of Investing and Don’t Know It

In this short read, you’ll learn how a quick look at your investment statement can determine if your portfolio is truly diversified.

“Be diversified.”

You’ve probably heard this simple rule of investing. It goes right along with the adage, “Don’t put all your eggs in one basket.”

The mutual fund industry claims to offer investors a solution to being diversified. How diversified is it really, though?

Evidence shows mutual funds and index funds do not offer nearly the amount of diversification as investors are led to believe.

Say for example you have money invested into both American Funds Growth Fund of America, a mutual fund with ticker symbol AGTHX, and Vanguard 500 Index, an index fund with a ticker symbol VFIAX.

AGTHX has 299 unique U.S. Large company stocks selected by the fund manager to invest in (this is called stock picking). Meanwhile, VFIAX is invested in all 509 stocks.

Sounds like a good mix, right? But how much of your investment is actually invested into each of the unique holdings of the fund?
The answer is startling.

By adding the total amount invested into each stock within the mutual fund and index fund, here’s what we learn:

• AGTHX: 29% goes to the top 10 holdings; 46%, top 25 holdings.
• VFIAX: 20% goes to the top 10 holdings; 37%, top 25 holdings.

In other words, $10,000 invested into AGTHX has nearly $5,000 invested into only 25 out of 509 uniquely available US Large Stocks, and $10k invested to VFIAX has nearly $4k into 25 of the same 509 uniquely available holdings.

This is not truly diversified.

This lack of diversification can have a significant impact. When markets, measured by the S&P 500 index were DOWN 40% like they were in 2008, an investor portfolio lacking diversification will experience the same decline.

However, an investor portfolio with greater diversification that could expect equal rates of return with less volatility may have only dropped 28%. How does this pay off? A $100k portfolio dropping 40% requires a total gain of 67% to return to the starting point. A $100k portfolio dropping 28%, requires a gain of 39% to get BACK to the $100k starting point. It pays to protect against DOWNSIDE volatility!

Exacerbating the lack of diversification, most investors that own multiple index funds and mutual funds are NOT invested into ASSET CLASS categories that achieve higher rates of return than US and International Large stocks.

SEE FOR YOURSELF

A few simple steps can help you see if your investments are truly diversified. Here’s how:

1. Look at your investment statement and find a ticker symbol for a mutual fund or index fund.
2. Go to morningstar.com and type in the symbol
3. Look for the name of the fund and click on it.
4. Click on the tab labeled Portfolio. There you will see something that looks similar to this (note the highlighted sections):

An analysis of ALL the positions in your mutual funds is an empowering step toward being truly diversified.

Investors that see what’s going on inside their investments have a transformed view of speculating and gambling. They are confident and free to avoid the perils of lack of diversification.

WHAT ELSE TO LOOK FOR

Being truly diversified is ONE of the three simple rules of investing that most investors have no idea they are violating.

For more information on the other two simple rules of investing, how to evaluate your portfolio for additional dangers, and a FREE report revealing evidence the mutual fund industry is NOT showing investors like you and me, provide your name and email address below or click here to schedule a call with me!

– Brendon Jenks
Investor Coach

About Brendon

Brendon’s role as a coach is to come alongside a client, show them in a distinct way what they own, and empower them to make a choice for their family’s future that they know is in their best interest. Investors who work with Brendon are empowered and truly diversified.

Brendon Jenks
Investor Coach