What’s the right number of funds to hold?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Is that too many funds or too few? It’s difficult to give a firm answer. So much depends on what you want to achieve and the risks you are willing to stomach. These factors will dictate the investment mix included in a portfolio. For example, someone investing for at least 10 years and comfortable with volatility might want to go 100% into stock market funds; someone retiring in five years and planning to withdraw money may want a portion of the portfolio in bonds, which tend to move counter to stock markets, although not always. Investors may also want other diversifying assets such as real estate or commodities. A financial adviser can help work out what you need.

Even within stock markets, investors may want a bent toward a particular region or country. So rather than following the typical allocation that a global tracker fund would give (67% US, 13% European and 4% UK for the Legal & General Global Equity Index, for example) they may want more, or less, in each. An investor may want more technology exposure, or to back renewable energy.

This can be achieved by buying regional funds and specialist funds - and this is when excessive fund buying can happen.

Here, I’ve set four questions to ask yourself.

Question 1: How many investments can you safely monitor?

Selecting your own shares requires some homework. With funds, a manager does that for you. But the fund investor must also keep an eye on each fund, especially for the exit of a star manager. And managers can also have fallow spells. It then requires a call on whether to hold until their mojo returns, or to sell. Either way, holding actively managed funds requires more monitoring. Do you have the time to do that with 20 active funds? 

Of course, funds that aim to track an index - so-called passive funds - require less attention.

Investment platforms offer deeply researched lists on funds, which can be helpful. For ours - the Select 50 - the research and selections are undertaken by Fundhouse, an independent funds rating agency.  

Question 2: Do you have hidden overlaps?

Commonly, an investor may have a core holding of a global stock market tracker fund, with other funds that add a flavour of particular countries or regions they want to back. And within that part of the portfolio, it’s just possible that the engaged investor has had their head turned by funds of a similar ilk - perhaps two high income funds that might both hold British American Tobacco. This may not be a problem but it is good to know where you do hold overlaps.
 
Some investment platforms have ‘X-ray’ tools that enable you to see these overlaps. They can show you the percentage of your portfolio you have in each company. I was alarmed earlier this year by my exposure to Nvidia across many funds. This included index tracking funds in the core and active funds on the periphery. In this piece - Tools to make you a better investor - we explain how to access your own X-ray report.

Question 3: Is it more expensive to be a multiple fund holder?

DIY investors face two primary costs - the charges on the fund and the charges applied by the fund platform for holding it for you. An actively managed fund will commonly cost around 0.75% or £7.50 a year per £1,000 of investment; passive funds cost a lot less.

Platform percentages vary considerably and so do pricing structures. This is important to the thinking on the number of funds to hold. Some platforms charge a dealing fee to buy and sell funds, normally as a pay-off for lower ongoing costs. However, this can rack up if you hold a lot of funds and like to tinker. And with investment trusts, the cousins of funds that trade as listed companies, there is nearly always a fee for buying and selling.

It is worth applying this lens to your thinking. Small allocations to many funds may not significantly influence overall portfolio performance and may add unnecessary costs.

Fidelity doesn’t charge to buy or sell funds but does charge £7.50 for dealing in investment trusts. A service fee of 0.35% is applied (reduced to 0.20% if you invest £250,000 or more) but this is capped at £7.50 per month, equivalent to £90 a year. The detail of our fees is explained here: Fidelity fees and charges.

Question 4: Would you be better with a ‘simple life’ option?

It kind of defeats the point of being a DIY investor, but you could stick with a single fund that is a ready-made portfolio. DIY-ing isn’t for everyone, after all.

Such funds can offer some diversification, which is key, by holding a mix of assets. If one flags, another may pick up the baton: when share prices fall, bond prices should rise, or that’s the theory. A popular allocation is to divide 60% in shares and 40% in bonds, or 80/20 for those willing to take more risk.

You can do this cheaply and easily with a single fund. The Vanguard LifeStrategy fund range is an example, with 80/20 and 60/40 funds among others. The simplicity and low cost of such funds, which track markets rather than actively selecting investments, has made them popular in recent years. There are also lots of actively managed funds that aim to create this balanced mix of investments - and also try to beat the indices that tracker funds follow. Our Select 50 offers a Balanced Fund - a mix of many of the funds on the list, and others. Its investment mix is currently 53% in stock markets, mostly in the UK, and 35% in bonds, plus some cash and other assets.

See the detail: Fidelity Select 50 Balanced Fund

Will I reduce the number of funds I hold?

In short, yes. Or at the very least I’ll be mindful of the very questions I’ve raised and that will help limit expansion from where I’m at. But ultimately, managing a DIY portfolio is an enjoyable hobby – and that enjoyment is something I wouldn’t want to diminish.

• Watch: The surprising truth about the FTSE 100 vs the S&P 500
• Read: What income might I get from a £500,000 pension?

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This article originally appeared in This is Money