Investments often come in different shapes and packages, but many have similar contents. For example, two seemingly different mutual funds can own the same stocks. In September 2012, for example, the top 10 holdings of Fidelity Magellan (FMAGX) and Fidelity Growth & Income (FGRIX) had five stocks in common.
There's nothing wrong with such portfolio overlap per se, and there’s no saying that two funds with heavy overlap at the top can’t ever be complementary. However, any time you see that much redundancy in two funds’ top 10 lists, it’s wise to ask yourself if you’re not using two investments to do the job that one could do just as well. And if both funds emphasize large positions in the same names, you may have built a portfolio that’s overly dependent on a few stocks. Overlap flies in the face of diversification. Here are some suggestions for how to avoid stock overlap in your portfolio. For more information about portfolio overlap, check out Funds 501: Avoiding Overlap When Building a Portfolio.
How to Avoid Overlap >>