A number of years ago I saw a film called Navigating the Fog of Investing. It makes the claim that most investment managers chase after themselves to own all of the same stocks in their portfolios.
One after another, managers and experts on investing and academics say that few in the mutual-fund game are really doing anything unique and that most managers have no idea how to beat the market and yet get paid handsomely to try.
I did not believe this at first.
Then I was challenged to have my portfolio analyzed to compare the holdings among the five different mutual funds I owned. At the time, I was with American Funds and I was comfortable with them because of their size, popularity, and the multitude of endorsements they received from people like Dave Ramsey and others.
But I accepted the challenge and handed over my statements. What I found was more than a little bit frustrating to me.
One of the reports was called the “overlap report.” This is an alphabetical listing of the top fifty holdings (companies) that I owned inside my five mutual funds. Under each company/holding are listed the five mutual funds I owned that owned that stock. On average, three of my mutual funds owned each one of the company stocks.
My portfolio failed the overlap test for diversification miserably!
Hear this. I chose five mutual funds so that I would not have all of my eggs in one basket. I was “diversifying.” These managers (all from the same fund family, remember) were buying nearly all of the same companies inside their funds.
Like the film said, they were chasing after each other to own many of the same companies inside their funds.
The managers killed my attempt at diversification.
This information is available to investors but is rarely given out, and this problem persists no matter the context. Individual investment portfolios and 401k portfolios alike are fraught with overlap.
Make sure you check this out for yourself. You may find that your attempts at diversifying have fallen short.
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