Sin #2 – Gluttony
Let’s get one thing straight: Mutual funds, by nature, are inherently diversified. While it’s true that there are various flavors of funds and that you can get burned if you put all your eggs in one basket, there is rarely ever the need investors to hold more than a handful of mutual funds in his or her IRA.
Take a fund like the Vanguard Total Stock Market Index (MUTF: VTSMX). The fund puts nearly all of its assets in individual stocks, save for a little cash as trades are executed. As of this writing, the top position is Exxon Mobil (NYSE: XOM) with a whopping 2.5% of assets. That’s hardly a majority position. As a result, the fund consists of some 50 stocks — and chances are that at least a few of those same companies will appear in any other blue chip mutual fund you choose.
That’s not to say there’s anything wrong with making a play on a specific sector or a specific strategy. But don’t fool yourself into thinking that a higher number of funds is always better. You could, in fact, just be bleeding cash in fees without boosting your diversification at all.