Avoid Fund Glut
Keep Things Simple: You Don't Need Many Mutual Funds

By Werner Renberg

"How many funds should I have to be properly allocated?" a reader asked.

"Would a small-cap fund, a mid-cap fund, a large-cap fund, and a bond fund do it? Where is the magic through asset allocation numbers?"

The "magic," I suggest, lies not in a particular number of funds but in allocating the assets of a fund portfolio among stocks, bonds, and cash in a way that has a high probability -- there are no guarantees -- of enabling him to reach his long-term investment objective without causing him to lose sleep because of excessive volatility.

What would be a "proper" allocation for the reader?

It would depend on how long he plans to be invested, the rate of return -- after allowing for income taxes, sales loads or commissions, and any other fees -- that he wants to earn over time, and the degree of short-run volatility that he is confident he can tolerate.

What would be a "proper" allocation for you? It could be very different, if you have a shorter or longer investment horizon, require a higher or lower long-run return, and/or have a different ability and willingness to tolerate volatility.

Let’s suppose that you want to be 60 percent in stocks and 40 percent in bonds -- a typical allocation for balanced funds -- and want to keep things simple because you have higher priorities for your time than watching the prices of a number of funds, reading all of their literature -- as you should -- and worrying whether to change your allocation.

You could do worse than investing in one no-load, low-cost balanced index fund such as Vanguard Balanced Index Fund, which is 60 percent invested in stocks to match the performance of the Wilshire 5000 Index and 40 percent in bonds to match the Lehman Brothers Aggregate Bond Index.

The Wilshire index reflects all 7,000-plus publicly traded U.S. stocks; the Lehman index, all 5,000-plus issues making up the $5.4 trillion taxable investment grade U.S. bond market. Thus, by investing the minimum required by just one fund, you would be exposed to the performance of the total U.S. stock market and all of the U.S. bond market except for $350 billion of corporate junk and $685 billion of municipal securities.

In the five years through 1999, when the Wilshire 5000 had an average annual total return of 27.1 percent and the Lehman bond index had an average annual total return of 7.7 percent, the Vanguard Balanced Index Fund averaged 19.1 percent.

Click here for Bogle's suggested portfolio for investors seeking active equity management.

Copyright © 2000 Werner Renberg. Reprinted with permission.

More articles by Werner Renberg can be found here.