If you happen to invest in mutual funds, one thing you must do regularly is look over and think through the top holdings of every one of your funds. Here's why:
About a year ago, I was looking at the key holdings in three mutual funds that I happen to own in my IRA, and I was disturbed to find that they all owned the same damn stocks.
One, a tech fund, had 12% of its holdings in Apple* and another 8% in Google. Okay, it’s a tech fund... maybe I can excuse this. Maybe.
Another fund (the name of which I'll reveal because of the sheer hypocrisy of it all, as you’ll soon see) I happen to own is Fidelity's ContraFund. This fund's charter is to find "contra" ideas--ideas that are contrarian in nature and that go against the consensus. Oh, and it's also supposed to be diversified across sectors and stocks too.
Well, ContraFund at this point held 9.3% of its assets in Apple and another 5% of its assets in Google! In other words, 15% of that fund is literally identical in both proportion and form to a tech fund that I already hold. ContraFund was just a tech fund in drag!
Finally, a third fund, a growth fund that I hold, also held Apple and Google among their top ten largest holdings.
So wait, let me figure this out: I'm supposed to pay mutual fund management fees for this? And be happy about it? You might be mortified that I could make such a rookie error in investing, but I did. Needless to say, I quickly began reallocating my money away from these funds.
All of this raises a few sticky questions that any beginner- to intermediate-level investor should ask:
1) What value do you get when all of your "diversified" mutual funds hold the same damn stocks?
2) Can it really be this painfully obvious that professional investors are as herd-like as the rest of us “amateurs”?
3) Therefore, why pay 1% (or higher) management fees to a herd-like mutual fund when you can use index funds to get properly diversified stock market exposure for as little as one tenth the cost?
Readers, I would love to hear your thoughts on mutual funds. Share them in the comments!
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* It turned out later that this particular fund blew out its Apple stock after the stock suffered a significant decline. Now the largest holding (by far) is Tesla. We’ll see if this is smart--or dumb.
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