One question that mutual fund investors commonly ask is: “How many funds should I own?” The number will vary according to how much money you have and how much effort you want to put into your investing.
Mutual funds provide you with a mechanism through which to participate in a large, diversified and professionally-managed portfolio of stocks without the need to research economics, industries, regions or individual stocks.
But when you invest in a mutual fund, you abdicate decisions about what stocks, regions, industries or even level of cash you hold, at least in each individual fund.
If that’s okay with you, then a single fund may be enough. But at least choose a fund that’s broadly diversified by all those criteria we’ve just mentioned.
An excellent example of a broadly-diversified mutual fund is Capital Group Global Equity Fund (Canada) (Series A fund code: CIF843(FE)). This global equity fund has a mandate to invest primarily in stocks on a global basis. It invests in both developed and emerging markets.
On one occasion, an investor asked Sir John Templeton how many funds he should own. “One”, replied Sir John. (On other occasions, he gave a different answer.) But after you choose a widely-diversified fund, how do you decide what else to buy?
Cover missing categories
First, some investment categories are simply not available to your first core funds. The analysts and portfolio managers at Capital Group seek undervalued securities, though the global equity fund does include growth-oriented stocks. But if the first fund you chose was a purely value-oriented mutual fund, for instance, you might want to complement it with a more growth-oriented fund.
Capital Group Global Equity holds relatively few small companies. But a smaller-cap fund worth, say, five per cent of your individual portfolio could have a significant impact on your bottom line.
After you cover these bases, anything else you do serves to second-guess the managers of your core fund. If you add a Canadian stock fund, you’re inferring that you want to overweight your portfolio in Canadian stocks—an understandable thing for Canadian investors to do. If you add an emerging markets fund, a health-care fund or an aggressive momentum fund, you’re implying you want greater exposure to these categories than you get in a core fund.
You might, for example, believe Capital Group Global Equity is a bit low on European exposure. You could, therefore, add Trimark Europlus to your portfolio to get more European exposure.
In all, six to eight equity funds should let you overweight most specialties. If you add more, you may start duplicating.
Own a dividend fund
Diversified, conservative equity funds, such as Capital Group Global Equity make good core portfolio holdings. But you may do well to include a dividend fund among your core holdings. That’s because many successful investors who invest directly in stocks find that over the course of a decade or two, dividends supply a large component of their total return.
It’s true that capital gains can supply more spectacular returns. But they’re irregular, often disappearing or leaving capital losses as a stand-in just when you need them most. Dividends, however, are a reasonably steady source of income. Better still, they tend to ratchet upward over the years.
One of our favourite funds in the Canadian dividend and income equity category is Dynamic Equity Income (Fund codes: DYN029(FE), DYN729(DSC), DYN629(LL)). The fund currently pays a monthly distribution of $0.07 a unit. With a net asset value per unit of $21.02, that amounts to an annual yield of 4.1 per cent. Dynamic Equity Income invests primarily in high-quality Canadian stocks with attractive free cash flows and growth. It’s suitable if you have can tolerate low to medium risk.
This is an edited version of an article that was originally published for subscribers in the June 2, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846