It's easy to become a mutual fund junkie. You see a fund you like, and you buy it. Then another one comes along that looks attractive, and you invest in it, too. Before you know it, you own so many funds that you can't even keep track of the semiannual reports, much less figure out if the investments are appropriate for your goals.
John Caccivio is a serious addict who owns 20 funds. "When I'm in doubt and trying to choose among three funds, I tend to buy all three," says Caccivio, 42, who is stationed with the U.S. Navy in Canberra, Australia. "Surely no one needs that many funds."
Diversification is crucial in investing, but you can usually accomplish it with no more than eight funds. About half of your stock investments generally belong in funds that invest in shares of large companies (divided between funds that specialize in fast-growing firms and bargain-price stocks). The remaining half should include funds that invest in small companies (again split between a fund that buys mostly fast-growing firms and one that invests mainly in beaten-down stocks) and a foreign-stock fund. That's five stock funds in all. Add a bond fund to reduce your risk, a money-market fund for convenience and perhaps a fund that invests in high-yield real estate investment trusts for variety. That makes a manageable eight, and you can get by with even fewer (see "All I Really Want Is One Simple Mutual Fund").
The easiest way to weed out your funds is to get rid of the laggards. Sort your funds based on the categories listed in the preceding paragraph, and keep the best one in each group. Sell the rest. To find out where each of your funds belongs, use Kiplinger's Fund Finder at www.kiplinger.com/tools/fundfinder.
Caccivio, for instance, probably ought to sell all five of his Janus funds. Janus is reinventing itself under new management, and it's too early to tell how the company's funds will fare. Caccivio also owns eight Fidelity funds. Almost all of them are good, but many of them are similar. For example, he doesn't need both Fidelity Contrafund and Fidelity Growth Company, both of which invest in large, growing firms. Contrafund is the better pick.
MAGAZINE
