Am I too Overweight in Mutual Funds?

As investors, one of our favorite words is diversification.   We are taught to diversify our portfolios to avoid exposure to any one particular investment or sector of the market and achieve balance.  One of the easiest ways to achieve diversification is through purchasing mutual funds, which I did at the beginning of my investing career.  However, now that I have grown as an investor and now own 30 individual stocks, I wanted to take a look back at my current mutual funds to determine if too much of my portfolio is allocated to these diversified holdings.  It is time to take a look at the five mutual funds I hold and determine if ACTION needs to be taken.

mutual funds

The MUTUAL FUNDS

Currently, I own five different mutual funds.  In total, the mutual funds total $16,200, or 25.5% of my total portfolio.  These five funds are located in two different accounts, which impacts the accessibility of the capital if I were to decide to make a move.

Roth IRA

Three of the funds are located in my Roth IRA.  I opened these positions during the infancy stages of my dividend growth investing career.  At the time,  wanted both dividend income and diversification, so focusing on dividend paying mutual funds sounded like a great idea.   So I took the capital I had and dividend it evenly among the three funds listed below.

  • ACLAX – 119.803 Shares; MV $1,994; 3.0% of Portoflio – This fund is a four star, silver rated fund on Morningstar. Some of the top ten holdings include: RSG, EMR (One of our favorites), NTRS, OXY, IMO, and CAG.  The major selling points on this fund were the diversification, historical performance, strong/consistent management team, and the fact that the fund has a mid-cap focus but still pays a strong dividend.   The one major downfall of this fund is the expense ratio, which is slightly over 1%.  However, I knew that a fund centered on finding mid-cap funds would cost more than others due to the extra research and time needed to manage the lesser known stocks.
  • OIEIX – 138.551 Shares; MV $1,916; 2.9% of Portfolio – Another fours star, silver rated fund. This fund does not mess around and is focuses on large cap, value stocks. Some of the largest holdings include: JPM, XOM, JNJ, MO, AAPL, PNC, PFE, and HD.  My favorite aspect about this stock is that it pays a monthly dividend.  While my check usually isn’t that large on a monthly basis, as evidenced in last month’s dividend income summary, it is nice to see your position grow on a monthly basis.   Isn’t that right Realty Income shareholders?
  • MEIAX – 55.556 Shares, MV $1,952; 3.0% of Portfolio – Also a four star, silver fund. This fund has some overlap with OIEIX as some of the top holdings include: JPM, JNJ, PM, PFE, LMT, USB, and MMM (one of my favorites).  However, unlike OIEIX, this fund pays a quarterly dividend and has a lower annual fee than the other two above.

Since these funds are held in a personal retirement account and are not affiliated with my employer sponsored retirement account, I have the ability to trade these funds without restrictions and liquidate my positions at any moment.

Employer Sponsored Roth 401(k) Accounts

Like most of us that are still working for an employer, we have a 401k plan that allows us to select fro ma small pool of mutual funds or the company’s stock.  For my company, we are allowed to select from a wide variety of Vanguard mutual funds.  Vanguard funds are nice because of the extremely low expense ratios.  In this account, I own two different mutual funds.

  • VWNAX – 149.224 shares; $9,726.42; 14.9% of Portfolio. This Vanguard fund is a large-cap value fund with an expense ratio of just .27%, significantly lower than the three funds disclosed above.  Some of the top ten holdings include JPM, MDT, PFE, BAC, MFST, WFC, PM, and PNC.   If you recall, I left my current employer in March and returned later in the year.  This was the mutual fund that I contributed to in my first stint at my current employer and I am no longer contributing to this mutual fund. Therefore, the only changes in value/shares owned are related to changes in market price and the receipt of dividends.  Another interesting nugget about this fund is that it pays a semi-annual dividend in June and December.  So it doesn’t pay frequently, but when it does, the dividend income checks have a huge impact on my monthly dividend income figures.  Want proof? Check out my dividend income summary from the last time I received a payout.
  • VINIX­- 224 shares; $9,726.42; .8% of Portfolio Very similar to the last mutual fund. However, two small differences.  First VINIX focuses on mirroring the S&P 500 versus investing in dividend stocks so the yield is slightly lower.   Second, VINIX pays a quarterly dividend versus a semi-annual dividend.  When I re-joined my old company, I thought it might be a good idea to invest in a new mutual fund to diversify my holdings.  Since this position will keep growing, I didn’t want to become too overweight in one mutual fund.  So now I will share the wealth in Vanguard and continue to max my contributions in this fund so I can receive the full benefit of my employer’s 401k match,which can be a very powerful tool for dividend investors.
  • Analysis

  • As I compiled the section above, there were a few things that jumped out at me. Here are some of the thoughts that came to my mind.
  1. There is a lot of Overlap ­- This became evident when I started listing out some of the major holdings in each fund. Outside of ACLAX, which focuses on mid-cap dividend stocks, there is a lot of overlap in holdings in the other four mutual funds.  Which makes sense considering that these funds are focused on generating a dividend from large cap stocks and there are only so many stocks to select from.  However, if my goal is to achieve diversification among these holdings, do I really need four different funds investing the same pool of stocks?  Wouldn’t one suffice?
  2. Why am I paying Such High Expense Fees – Is it terrible that my answer is “I don’t know why?” At the time of investment, it made sense to invest in mutual funds.  But I wasn’t as much of an expense hawk as I am now so I was willing to overlook the high expense ratios to achieve my goal of diversification.  In this day in age, with ETFs designed to achieve the same goal as mutual funds with minimal fees, why on earth am I voluntarily paying this annual fee?  A stupid/reckless mistake on my part.  I understand paying a fee for a mutual fund that invests in mid or small cap stocks because these companies require more time and research to identify/trade successfully.  But paying a fee to invest in a pool of highly covered large cap stocks seems ridiculous going forward.
  3. Lack of REITs in Holdings – This one kind of surprised me, especially considering I selected these funds with a dividend focused attitude.  I did not see one REIT in any of the mutual funds I own.  I am sure there is some reason why and the tax rules may be too unfavorable for fund families.  This was just an interesting observation to me so I wanted to share it all with you.

Where do I Go From Here?

Based on my analysis and observations above, I think the answer to the title of this article is yes.  Holding five mutual funds, which account for over 25% of my portfolio, seems a little heavy.  Especially considering that many of the mutual funds invest in the same pool of stocks and are accomplishing the same goals.

Well, first things first.  Let’s talk about the liquidity of these funds.  Since two of my mutual funds are in an employer sponsored plan, there isn’t much I can do outside of investing my capital in a different mutual fund.  And trust me, Lanny and I have performed plenty of research on the available plans in the portfolio and we have selected two of the best.  So as of now, I am not going to touch the two Vanguard funds and I will continue to invest in VINIX with each paycheck.  Our employer matches 50% of all contributions, so I will continue to contribute the maximum amount each paycheck that will allow me to receive the full employer match next year.  Plus, the expense ratio is very low, which is a huge positive compared to the other funds.

While I can’t liquidate my two Vanguard funds, it is a completely different story for the three mutual funds in my Roth IRA.   I have the freedom to trade these funds as I please.  When I initially invested in these funds, I was at a different stage of my investing career and I needed the diversification.  However, now that I have grown as an investor, owning 30 individual stocks, there is no need to diversify through owning independent mutual funds.   The fees are too high and diversification is achieved through my employer’s plan.  So after I receive my capital gain distribution in December, which always results in a nice payout, I am most likely going to sell these funds and use the ~$6,000 to invest in some powerhouse dividend stocks.  Which stocks will I invest in?  I’m not entirely sure yet.  I’m going to special screener in the next month unique to this situation that will help me identify how I should allocate the $6,000 in capital when it becomes available. The screener will look to identify great companies with a long-term track record with a yield in excess of the yield I am receiving on these dividend focused mutual funds. I’m not certain yet, but I believe one of the moves I am going to make is to invest half in Realty Income based on the results of my last stock analysis.  Another option is to focus on one of the stocks on my “Always Buy” list or one of the high yielding stocks on our foundation stock listing.

What are your thoughts on my strategy?  What percentage of your portfolio are allocated to mutual funds? Do you think I am overweight?  Should I consider investing in ETFs in lieu of mutual funds or dividend stocks with the capital to maintain the diversification?  Do you have any recommendations for stocks that I should consider?

-Bert

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19 thoughts on “Am I too Overweight in Mutual Funds?

  1. I would agree that your high expense funds probably don’t have a big role in your portfolio anymore. I’m still a fan of having index funds/ETFs in my overall portfolio so the fact that you have some exposure in you 401k is good.

    I personally would have some portion of my taxable portfolio in index funds as well but mainly because I like the diversification in my pre-59.5 funds as well as my retirement.

    • I agree, some broad market exposure is healthy for your portfolio. Having a 401k that I contribute to twice a month is huge for maintaining a healthy exposure to the broad market as my holdings grow elsewhere. I feel much better about dumping the three mutual funds after receiving the capital gains distributions knowing that I am not eliminating my allocation all together.

      Do you have any ETFs that you recommend? Any that you own that pay a great dividend?

      Thanks for stopping by and you comment.

      Bert

  2. I am in a similar position except my ratios of mutual funds to individual DGI stocks are much worse due to my many years of 401k investing (& stupidity). I’ve decided to slowly transfer the funds across and buy stuff on my watchlist, screener, etc. My fees are in the 0.5% annually — which equates to several thousands in fees per year regardless if market performance.
    D4s

    • D4S,

      For mutual funds that seems to be a pretty good expense ratio actually. Not terrible for non-Vanguard or large mutual fund company funds (assuming you are not using their fund families). I like your strategy though. Instead of transferring in new capital to make a purchase, you are liquidating mutual fund holdings to fund purchases in other investments. Please correct me if I am wrong. I have considered this an all or nothing transaction. Selling all holdings at once and moving on from this episode.

      What’s your ratio? And just out of curiosity, what do you mean by stupidity? Did you allocate too much to your 401k prior to investing on your own? Don’t feel like you need to answer though if you do not want to.

      Thanks for stopping by!

      Bert

      • Bert,
        You are right. I am liquidating my funds and buying DGI stocks instead of adding new capital. (Fresh capital is still added since I am maxing out my contributions.) I have around 10 funds ranging from 30k to 80k. I am starting with the 30k first to see how it goes. To fully convert it over will take some time.
        D4s

        • Of course. That won’t be and probably shouldn’t be a one time transaction. It isn’t as if you are invested in a terible stock that needs to be liquidated immediately. You own stock in a great mutual fund. No need to rush.

          D4s

    • Ben,

      Thanks for sharing the article. I’ve never studied or read up on the Permanent Portfolio approach to investing, but it is an interesting concept. I can see why it was one of your favorite articles to write though. I think I need to assess what my end goal is here. If it is still to achieve diversification, then I have to give a hard look to the approach you’ve outlined in the article because right now I am all in on stocks. If my main focus is building an income stream or I want to diversify only in stocks, GLD or TLT might not fit that mold.

      On a side note, it was interesting to see how subbing Dividend Aristocrats for stocks improved the total return of a portfolio. It makes perfect sense considering that DA’s demonstrate long-term success and an ability to pay a growing, stable dividend. You just don’t see the impact quantified or put right in front of you the way you did in your article. Thanks for doing that!

      I appreciate your comment and pointing me in the direction of your article. Have a great Sunday afternoon.

      Bert

  3. The overlap can be surprising. Aside from the obvious issue of fees, my issue with funds are overlap with my individual holdings and there are always holding in the funds that I simply don’t want to own.

    As you mentioned you were in a different stage in your investing when you initiated these funds. We’re constantly evolving and learning. I started with funds and moved to individual dividend stocks and became a “collector” of individual stocks at one point having over 60 different companies with small amounts in each company. This no longer worked for me when I became involved in options because I needed 100 share lots to work with so I changed my approach.

    You’re at a different stage now and you’re re-evaluating. I like your strategy either diversify among dividend stocks with great track records or dividend ETFs. The issue with dividend ETFs is you will run into overlapping again with stocks you already own.

    • Chimp,

      Very true. You bring up a great point. I forgot that the these funds hold tons of positions, many of which are not disclosed to investors, that may not fit my personal investing strategy. I’ll have to perform more research into ETFs. Maybe there is a niche ETF that covers a sector of a portfolio that I do not wish to dive into as an individual investor. Something that comes to mind is purchasing an etf that invests in small/mid cap dividend stocks. I would never purchase a ton of those stocks on my own. However, I would consider owning a pool of the stocks and earning a nice yield.

      Isn’t it funny how we grow and a strategy that worked for us a few years ago may not be the appropriate strategy a few years later? Did you ever forsee yourself at the beginning of your investing career writing options (I am assuming that’s what you are doing since you mentioned the 100 share threshold). I guess the important thing is that you do not become set in your ways and stuck with one investing approach. You needs and the market evolve overtime and you must adapt to the new surroundings and circumstances.

      Thanks for the helpful and insightful comment.

      Bert

  4. Hi Bert!

    I had never been a big fan of mutual funds due to their high management fees and that it’s not easily liquidable although my RRSP is invested in the TD e-series. I try to be as most diversified as I can holding a certain percentage in the US/Canadian/International index.

    Personally, I like ETF’s better especially the Vanguard etfs. I’ll be getting rid of my mutual funds sooner than later. I think 25% is a little heavy on the mutual funds but that’s just my opinion. Seems like you’ve done a lot more research into it than I did. 🙂

    • Hey Jeff,

      I’m definitely leaning towards finding an etf in a niche industry that I don’t know that much about. But thanks for giving your opinion, I’m definitely thinking 25% right now is too much for mutual funds, especially considering that my 401k retirement accounts are going to continue to grow with each paycheck.

      What’s your ratio at the moment? Any good suggestions for etfs that you would like to pass along?

      Thanks!

      Bert

  5. I am also invested in 5 mutual stock mutual funds. 4 in the 401K, 1 in taxable and I have 1 bond fund. Luckily, the 5 funds in my 401k are capped at $10 per year in fee’s. I’m not sure how my company worked that deal out but everyone I know only pays $10 a year in fees no matter what the total capital invested. It’s a pretty good deal and one reason why I have a bit more than necessary.

    I think it would be wise for you to consolidate and I myself will be looking hard at my 401k holding within the next few days because of this post.

    Thanks for reminding me to be more active in my 401K accounts!

    ADD

    • That’s sweet that the funds are capped at a maximum fee. Does the cap float with the market value or is it $10 regardless if you contribute $1, $100, or $100,000? Seems like an interesting concept to me. When you have a deal like that you have to take advantage of it!

      I appreciate your advice. I’m definitely going to consolidate my mutual fund positions after I receive all of my capital gains distributions. I’m thinking this may be my first major transaction of 2016!

      Please share your 401k analysis. Whether you write an article or comment again on this post, I’m curious to see what you think about your current 401k situation and how you may adjust it.

      As always, thanks for stopping by!

      Bert

      • In the 5 years I have worked for the company, I have gone from a 401K balance of $0 to over $30,000 and I have always paid $10 in fees. The fees seemed based off of the percentage of money in the funds though. For instance fund 1 has $1000 in it: fee is $0.33 = $1/$30 * 10. Fund 2 has $25000 in it: fee is $8.33 = $25/$30 * 10. If you were to flip flop the money in the funds, the fee would also flip flop.

        I usually do a 401K update in January / March and July. January after big payouts in december. March because my company inputs $2000 into 401K and July because its after decent payouts in June so you’ll definitely see one coming soon.

        As for reviewing my funds. I did it yesterday. Updated allocation on some of them for new capital and my one bond fund is has a decent chunk in it now so I’ll be looking to invest that during the next market downturn. All coming in the next 401K update article.

        Cheers!

        • Interesting concept for the fee, thanks for taking the time to break it down to me. Overall, that’s such a low fee compared to others. I’m excited to read your next 401k article and see the detailed breakdown. It makes sense to re-rack after each major event because the dollar amounts you are mentioning can have a pretty material impact on your fund allocation. Anyway, hopefull you receive one heck of a payout in December!

  6. I would just sell the fund that is over 1% and buy some ETF’s as you mentioned. You will most likely keep adding new capital to dividend stocks, so its good to have a diversified portfolio. The mutual funds might seem overweight today, but your individual stock allocation is growing faster. Good luck.

    • Thanks for the advice EL. It looks like that is the direction I am leaning towards. That’s a great point, the allocation will continue to shrink as I add more individual stocks to my position. I don’t want to liquidate it all or too much because then I would probably find myself underweight haha Then I’d be having the reverse problem.

      Bert

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