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How Many Mutual Funds is “Too Many”?

A reader writes in, asking:

“I read your book investing made simple. The book does not mention how many  funds are too many to have in a portfolio. Do you think 9 funds is too many to have in my 403b portfolio?”

There is no broadly applicable, definitive answer for how many funds is “too many.”

The only time that a portfolio could be clearly, objectively said to have too many funds is when the portfolio includes a fund that serves no purpose, because it does nothing other than duplicate other funds in the portfolio. For instance, if an investor had an IRA that included:

  • Vanguard Total Stock Market Index Fund,
  • Vanguard Total International Stock Index Fund, and
  • Vanguard Total World Stock Index Fund…

…then it would be clear that this investor has “too many” funds, because the same overall allocation could be achieved using fewer funds. That is, any desired domestic/international breakdown can be achieved using the Total Stock Market and Total International index funds — no need to include the Total World index fund as well. (Alternatively, if the investor is happy with the domestic/international breakdown included in the Total World index fund, he/she could use only that fund and eliminate the other two funds.)

So, at least in my view, pointless duplication of holdings is the only time that a portfolio would objectively, clearly include “too many” funds.

There are many cases, however, in which an investor could say, “this is too many funds for me.”

That is, some investors (myself, for instance) place a high value on simplicity and do not care so much about being able to custom-tailor their allocation in various ways, so they use a single all-in-one fund (e.g, target retirement or Vanguard LifeStrategy fund) for their portfolio.

Conversely, some investors don’t at all mind managing a portfolio of many holdings, and they do care quite a bit about holding some very specific asset allocation (e.g., overweighting certain groups of stocks in their portfolio by holding a REIT fund, small-cap value fund, etc.), so they will select a portfolio consisting of several different funds.

And some investors are somewhere in the middle of that spectrum, preferring to use something like the “three-fund portfolio” often discussed on the Bogleheads forum (made up of a domestic total stock market index fund, an international total stock market index fund, and a diversified bond index fund).

Any of the above approaches can be perfectly rational — it’s simply a matter of personal preference.

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