How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?

Can investors receive diversification benefits from holding more than a single mutual fund in their portfolios? Simulation analysis shows that the time-series diversification benefits are minimal but that the expected dispersion in terminal-period wealth can be substantially reduced by holding multi...

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Bibliographic Details
Published in:Financial analysts journal 1997-03, Vol.53 (2), p.37-46
Main Author: O'Neal, Edward S.
Format: Article
Language:English
Subjects:
Budget deficits
Certificates of deposit
Diversification
Economic justification
Equity
Equity funds
Financial investments
Financial portfolios
Growth funds
Income funds
Investment decision
Investment policy
Investment trusts
Investors
Mutual funds
Portfolio diversification
Portfolio management
Portfolio selection
Qualified tuition programs
Rates of return
Risk management
Scandals
Simulation
Standard deviation
Stocks
Studies
Time series
Variables
Volatility
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Summary:Can investors receive diversification benefits from holding more than a single mutual fund in their portfolios? Simulation analysis shows that the time-series diversification benefits are minimal but that the expected dispersion in terminal-period wealth can be substantially reduced by holding multiple funds. Portfolios with as few as four growth funds halve the dispersion in terminal-period wealth for 5- to 19-year holding periods. In addition, downside risk measures decline as funds are added to portfolios. These advantages to multiple-fund portfolios are especially meaningful for investors funding fixed-horizon investment goals such as retirement or college savings.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v53.n2.2070