With more than 2,000 different funds on Hargreaves Lansdown, the UK’s most popular investment platform, investors have a lot of choice. And while it’s wise not to put all of your eggs in one basket, it is just as sensible not to spread your money too thinly.
While an investment portfolio containing just one or two funds might seem a little lonely, if you choose the right ones, this may be more than enough.
Building a portfolio containing dozens of stocks and funds not only takes time to manage, but can lead to an overlap that leaves you overexposed to certain companies or sectors. “Diversification is a good thing, but it can also be taken too far,” said Jason Hollands from the wealth manager Evelyn Partners. “Own too many funds and you risk ending up with a museum of past fund tips that are hard to monitor and end up just owning most of the market rather than having a well-constructed portfolio that you can stay on top of, have conviction in and easily rebalance.”
There’s no one correct answer to the question “how many funds should you own?”, but there are a few things to take into account.
Where should I start?
When you begin investing, you are starting with a blank piece of paper; be disciplined about what you add and don’t overcomplicate things.
Advertisement
Platforms such as Hargreaves and AJ Bell allow you to start investing with as little as £25 a month, while with the US investment giant Vanguard the minimum is £100. If this is all you have to spare, you could get by with just one fund while you build up a larger pot.
If you are in your twenties or thirties and are investing for your retirement, start with a passive fund that tracks the return of a global stock index, minus fees. The Vanguard FTSE All-World exchange traded fund (ETF) charges 0.22 per cent a year, and holds 3,744 stocks with 20 per cent of its allocation in technology firms.
“I don’t see anything wrong in using just one a passive fund if you’re just starting out — it gives you broad market exposure for a very low cost,” said Jonathan Miller from the research firm Morningstar.
Isn’t that too risky?
You need to have a high tolerance for risk because stock markets are volatile. Global share prices fell 18 per cent on average in 2022, for instance. But over the 30 years or so that you’re investing, you should still make money, particularly if you invest the same amount consistently every month.
One drawback is that you don’t have much diversification. You are only exposed to equities and in the case of the Vanguard fund, 63 per cent of your cash is in North American firms. “You end up with more riding on Apple than the entire UK equity market and very little invested in India, one of the fastest growing markets globally,” Hollands said.
Advertisement
He suggested “one-stop-shop” funds, which aim to provide a fully diversified, ready-made portfolio that invests across many different asset classes, such as shares from developed countries and emerging markets, plus cash and bonds. Some are aimed at adventurous investors happy to take risk, while others cater for the more cautious.
Vanguard’s LifeStrategy range, which has fees of 0.22 per cent a year, is popular. Most platforms have their own in-house portfolios, where annual fees vary from 0.3 per cent to 1.5 per cent. The cheapest will be made up of passive funds, which aim to replicate the holdings and performance of an index or sector, while the more expensive will use active funds, where stocks are picked by professional fund managers.
What if I have lots of funds?
If you follow fund updates from platforms or regularly read newspapers, it can be tempting to continually add new funds to your portfolio, yet this is not always necessary.
Regularly adding to the holdings you already own is a better strategy. Monthly savings plans can help to keep you disciplined.
Hollands suggests putting a cap on how many funds you should hold — his is 20.
Advertisement
“When I am considering adding something new that would take me over my self-imposed limit, I look at my existing holdings and consider whether any should make way for the new idea. That ensures that every holding gets scrutinised before going ahead,” he said.
In truth, there is no magic number. It’s more important to consider your appetite for risk and ensure that you hold a diversified portfolio that won’t keep you awake at night.
Keep on top of all of your funds and read their annual reports to check that the fund manager hasn’t suddenly changed its investment style or that the fund hasn’t become more, or less, risky. You should also re-balance your portfolio regularly, taking profits on the funds that have done well and buying more of the funds you own that have done badly.
If you have too many funds, this process will take too much time and cost too much in transaction fees. As Miller said: “Keep it simple, control costs and stay disciplined.”
