What about mutual funds--how many mutual funds do you need to have a diverse enough portfolio? The answer is—you guessed it—it depends. Some funds, such as target-date funds, can deliver a lot of diversification in one package, providing exposure to stocks and bonds as well as U.S. and foreign securities. Investors can arguably obtain adequate diversification by buying a single target-date fund and calling it a day.
Meanwhile, an investor could build a 10-fund portfolio and still not achieve adequate diversification, assuming all the funds focused on a similar part of the market. That may sound farfetched, but it was actually the case in the laste 1990s, when many investors amassed multi-fund portfolios with a strong bias toward growth stocks, especially technology names. Seven large-growth funds simply won't diversify a portfolio the same way owning one large-blend fund and one small-value fund and one small-growth fund would.
What You Really Need: Diversification >>