Do You Have Too Much in Any One Stock?

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Do You Have Too Much in Any One Stock?

Sometimes, two funds’ portfolios may look slightly different, but you need to be aware of how much you own of any particular stock. For example, both fund managers may have made outsized commitments to computer giant Microsoft, increasing your issue-specific risk.

If you invested in only one or two funds, you could determine your portfolio overlap by scouring shareholder reports and punching numbers into a calculator. But if you own more than a few funds or if you want to see just how another fund might change your current portfolio mix, this process is cumbersome. Online tools such as those offered by Morningstar offer an easy way to check for overlap.

How Instant X-Ray works

The program examines each fund’s top holdings and weights them according to how much you have invested in each fund. If you have included individual stocks in your portfolio, the program can easily consider them in the final balance as well. This is particularly important if you own a significant amount of your employer’s stock in your 401(k) plan; you may find that your mutual funds also own that same stock. There’s nothing wrong with holding some of your employer’s stock, but you need to balance that investment with the rest of your portfolio.

Do you own too many large-cap funds?

Large-cap offerings can make great core holdings for your portfolio, but it’s easy to overdose on them. After all, they often get a lot of media coverage, they’re easy to buy, and they’re pretty simple to understand. It’s vital that investors concerned about overlap avoid large-cap addiction—especially large-cap offerings from the same fund family. Here’s why: The large-cap universe is relatively small. Less than 9% of all stocks can be classified as "large cap." Generally, a fund shop’s managers will draw upon a single research pool, so there’s a good chance of overlap if you buy multiple large-cap funds from a single family. Incidentally, the odds of duplication increase if you stick to large-blend funds, the universe of the S&P 500. In fact, there is little justification for owning more than one large-blend fund. So once you have picked up a large-value and a large-growth fund—or a single large-blend fund—start looking at options elsewhere.