Is Your Diversified Fund Portfolio Truly Diversified?


This week’s AAII Weekly Digest highlights these “must-read” AAII articles:

  • The Top Mutual Funds Over Five Years: Health Care Remains on Top: Health care has been one of the best-performing mutual fund categories for each of the last five years. It was the top fund category in 2015 and the only category besides the technology sector to gain more than 5% for the year. For 2016, seven of the 10 top five-year performers are health care funds. But before allocating solely to health care funds read on.
  • Is Your Diversified Portfolio Truly Diversified?: Mutual funds—and more recently, exchange-traded funds (ETFs)—have offered safety and diversification by allowing individual investors to buy shares in many companies in order to spread risk. It is important for investors to understand what role they play and what role the fund managers play in ensuring proper diversification of their portfolios. We highlight what diversification is and why it is important, then discuss why the appearance of diversification may not actually mean that your portfolio is truly diversified.
  • Nine Timeless Rules for Investing in Mutual Funds (and ETFs): It is surprising how seductive any article can be if it proposes an arbitrary number of rules for doing something you are even remotely interested in. That being said, this article focuses on the arbitrary number of nine—but the underlying rules themselves are critical if you invest in mutual funds or exchange-traded funds, or are contemplating investing in them.
  • How to Measure the Skills of Your Fund Manager: There is a big difference between stocks and mutual funds when it comes to picking a winner based on observable characteristics. If there is an observed characteristic that predicts higher performance, the stock price will rise immediately and thus eliminate any profit that could be had from investing in the stock. However, investors can take advantage of an observed characteristic that predicts higher fund performance. As long as the fund keeps its strategy unaltered, and as long as the observed characteristic predicts good performance, investors will benefit by investing in the fund.

Our Member Question for this week is:

If you prefer mutual funds or exchange-traded funds (ETFs) over individual stocks, what is your primary reason?


Last Week’s Results:

How closely will geopolitics be linked to market price movements over the next 12 months?


Guide to the Top Mutual Funds

Our annual mutual fund guide provides information and performance statistics on more than 730 funds. Though 15 categories showed gains this year, none of their figures were higher in 2015 than in 2014. Furthermore, 33 of the 71 categories ended 2015 in negative territory, an increase from eight in 2014. Despite fund outflows, there were some bright spots during 2015. Twenty-two funds out of the top 50 performers tracked had double-digit gains in 2015.

The AAII Weekly Digest is one of the many benefits of AAII membership. To learn more, consider a risk-free 30-day Trial AAII Membership to start becoming an effective manager of your own assets.


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