Overdiversification and Planning

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Aug 29, 2008 2:45 am

Hey There!

 
Two questions tonight...first of all, I'm finding that when I'm compiling MF portfolio's I'm being drawn back to performance, morning star ratings, and the things that you "shouldn't" be selling on. Obviously, I look to align the objectives of the client with the "objective" of the fund. I.e. I'm not going to put a lil old lady needing fixed income into Small Cap World or EuroPacific Growth (well, not much anyway). As for expenses (annual operating exp.) I'm not too concerned if one is higher than the other because, if we're comparing A shares to A shares and a more "expensive" fund is getting better returns, who cares? I'm asking for SEASONED vets here who have some good insight as to their practice of:
1. Picking Mutual Funds and
2. How many funds is appropriate per investable dollar ranges? Some guys argue there's no such thing as over diversification, and others say it's a huge problem. I mean, you could put some 500k client into 2 MF's indirectly owning 200 companies and that is pretty diversified...any thoughts on this??
 
My other question is this: as an Advisor (EDJ) I'm finding that I have to market myself as more than just a guy who ppl come to with buy and sell orders. I'm not sure how I feel about FAST yet, but more than anything, I'd like to draw prospects in by talking about having a financial PLAN and why that's key. I'm hoping someone on here can help me find a study or article that shows the difference betwen wealthy, middle class, and poor and the differences between their planning efforts with regards to these classes...I've seen stats on this before (i.e. 2% of population are wealthy, they have a Dream, Goal, Plan ,and they Review it, where as 60% of population is middle class, they only have a dream and a goal, etc.) If someone knows where I can find studies like this or information that is helpful to show to a prospective client to get them to recognize how important a plan is - please let me know!!
 
Sorry for the LONNNNG Post!!
Aug 29, 2008 4:12 am

Yes, I am in production. And please don't worry, I don't get offended by other's opinions - especially on this board. I realize and apologize for such a vague question. I do have my own thoughts on this but I came to the board to get more opinions - afterall, I am not set in my ways so I am open to what others say. I was not surprised to see the "cookie cutter" approach used at your firm - not good or bad - just wasn't surprised...I was sure they had something like that out there. I know Jones does not (at least not to my knowledge).


I can definitely appreciate the purposes of diversification, int'l to domestic, equity vs. bond, tax managed, etc. I was just hoping for some personal opinion as far as what you all are using out there. Some of the vets in my region ONLY use 4 core funds no matter who the client is or how much they have to invest (scary to me) and others will use 25 funds no matter how much the client has (10k or 1 mill) so I'm just trying to get more opinions. I also like to know what criteria people are using for qualifying funds...I fear a lot of reps just use morningstar stars or the last years performance, etc.
 
I hear you on the asset allocation vs diversification piece as well. I completely understand the implications of churning and excessive commissions, splittinb breakpoints too. I think my question is really about portfolio theory and instead, I'm trying to focus in on what's being used in common practice...that's all. Hope I didn't bother anyone with this post.
Thanks for your feedback. I'm looking forward to more.
Aug 29, 2008 9:42 am

8 funds for 25k is overboard.  why not use ONE asset allocation fund that has auto rebalance?  You may not now, but after being in business for a few years, you will kill yourself doing lots of rebalancing for small accounts earning no $.

Aug 29, 2008 10:03 am

ICE, that seems liek an awful lot of funds for a small dollar amount, but to each their own.

 
Gold, I typically use the core/satellite approach with amounts under a 100K; so, I will use a well balanced core fund like Capital Income Builder, First Eagle Global, etc.  I will then build around it based on risk tolerance, age, etc. - add some bonds (for income people, I will add a domestic bond, global bond, and high yield bond).  I may add to the equity positions with some Capital World Growth & Income, Fundamental Investors, etc.  I will then add some hedging-type fund like Ivy Asset Strategy or Blackrock Global AA.  It all depends on the client, but the point is to start with a solid core, and build around it based on where you want to go.
 
For over 100K, I will tend to seek specific funds for each asset class/category. 
 
These are not hard and fast rules, but my general rules of thumb.
Aug 29, 2008 10:06 am

One other thing Gold, if you are unsure, just use the mutual fund model portfolios (not the Advisory models, but the regular fund-family models).  I don't use them, but I have looked at them, and they are a great start if you are unsure.  Just don't use them for small amounts - I am not a fan of splitting 20K among 8 funds.


Also, if you do any DCA business for IRA's or whatever, put it into one balanced core fund (Capital Income Builder, First Eagle Global, even American Balanced).
Aug 29, 2008 12:42 pm
iceco1d:
Some people would use that model and nothing else for a $500K account.  Some would use 30 or 40 funds for that size account.
 
That would be crazy.
Aug 29, 2008 12:50 pm
iceco1d:

Yup, but I'm working with a client right now that has (soon to be HAD) 27 funds on $190K...I also have another prospect who has $165K in 1 fund (and it's not an asset allocation fund)

 
Where do you find these crazy cases?  The 1 fund with $165k wouldn't be so bad if they had a lot of other money elsewhere.
 
 
Aug 29, 2008 1:26 pm

I get a lot of the all-of-my-stuff-in-my-company-stock guys.  Granted, the one's I'm referring to have averaged about 17% per year for the past 20 years (plus their $1-$1 company match), so most are rich because of it, but man, it's scary. 

Aug 29, 2008 1:30 pm
B24:

I get a lot of the all-of-my-stuff-in-my-company-stock guys.  Granted, the one's I'm referring to have averaged about 17% per year for the past 20 years (plus their $1-$1 company match), so most are rich because of it, but man, it's scary. 

 
I have one of those right now.  His ESOP went from $105k to $570k from 2004-2008.  He will be retiring in 2 years.