Ever think of how many mutual funds you really need in order to have a diversified portfolio?

Mary Rowland, who is a personal finance expert and the author of The New Commonsense Guide to Mutual Funds, says that three is probably the minimum number needed in order to achieve solid diversification and 12 is at the outer limit for a really hefty portfolio. In truth, it's pretty much a given that the larger the portfolio, the more funds you will have. In fact, according to Mutual Fund Investors Association, one-third of their subscribers with portfolios of $1 million or more owned 15 to 19 funds. Of course, this goes back to the 1990s raging bull market. I understand that today we are probably looking in terms of four funds that the average mutual fund investor owns.

If you are talking about what these portfolios can look like, consider that if the investor is in his or her 30s to 40s, the core equity fund should comprise 30 percent, with small-cap growth amd small-cap value at 15 percent each followed by high-yield bond, mortgage bond, and international at 10 percent each, and cash at 5 percent. Sector makes up the remaining 5 percent. Do I have 100 there?

Now, if the investor is in his or her 50s to 60s, the changes are quite noticeable. The core equity fund and the mortgage bond make up half, or 25 percent each, while strategic bond is 20 percent and then 10 percent for each of short-term bond, international, and cash.

Of course, what to allocate and how much depends a great deal too on the risk tolerance and primary goals. When the investor is in the 30-40-age range, risk tolerance is pretty much at a comfortable level and goals involve college and then retirement. When we look at the 50 to 60 category, risk tolerance is then moderate and the primary goals are clearly retirement and retirement income.

Rowland believes that one can achieve diversification in a single fund provided it is an asset allocation or a balanced fund. However, she points out that once there is enough money to meet the minimum requirements in at least three funds, then the investor will be able to cover the three basic asset classes which are still stocks, bonds, and cash.

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