If You Own Everything , You Actually Own Nothing
What constitutes an overdiversified investment portfolio ?
Courtesy HODGES CAPITAL MANAGEMENT , INC .
How familiar does this scenario sound ? Into your investment accounts , you pick a couple of the best performing mutual funds you can find and spread around your contributions into each . Then , at the start of the next year , you again look for the best funds and make another contribution . Year after year , repeat , repeat . Perhaps your employer changed 401k providers at some point , and you had to choose from a whole new set of funds ? At the end of a couple decades , you might end up owning 10-20 mutual funds in the aggregate of all your accounts .
Certainly , there is nothing wrong with owning mutual funds . They are great investment vehicles when you have smaller sums of money and are in the accumulation phase of your investment life , but if you own too many , you might have gaps or redundancies in your investment portfolio . There might be a better way to have larger sums of money managed . Allow me to explain .
In the above example , you were probably given a narrow list of funds from which to choose , and so you did a little homework , and selected . For most folks , this is merely an exercise in picking the best performers ( from past data , mind you ), and crossing your fingers . If we dig a little deeper , we might find that the average mutual fund ( depending on size ) might contain 100 stocks . Multiply that by 10-20 and you ’ re the proud owner of fractional bits of 1,000-2,000 stocks ! On top of the sheer volume of stocks you own , many funds own the same stocks . In some instances , you could theoretically own the stock of XYZ 10 , maybe even 15 times .
How about transparency , fees , and taxes ? The only way to see which stocks your mutual funds own is to go to the fund ’ s website and look for yourself . You will never be able to pick up the phone and talk with the fund manager about his / her thoughts on the market , certain industries , or stocks . On the fee front , mutual funds have various annual fees to fund their operating expenses . These can be anywhere between . 25 % -
PHOTO BY AUSTIN DISTEL
1.5 % depending on the size of the fund , the types of stocks they purchase , or investment style they follow . The fees come out of your investment dollars . If you then have an advisor handling your affairs this way , you must account for that fee as well . These fees vary depending on the scope of what your advisor provides , but for most accounts around $ 1 million , it ’ s safe to budget about 1 %. Finally , you have no control of your capital gains situation ; your money is comingled with everyone else .
If you are invested this way , you most likely have redundancies in holdings that are entirely unnecessary , you have no day-to-day look into what the funds own , tax gains / losses are uncontrollable , and you ’ ve paid twice ( once to the funds and once to your advisor ). If you spread yourself too thin , you might compromise your results . If this sounds like your current portfolio , we believe there is a more efficient way to provide ample diversification , true transparency , and tax efficiency . We would enjoy talking with you .
Wide diversification is only required when investors do not understand what they ’ re doing .
-WARREN BUFFETT
Hodges Capital Management , Inc . (“ HCM ”), is an Investment Advisory Firm registered with the Securities and Exchange Commission (“ SEC ”), is a wholly owned subsidiary of Hodges Capital Holdings and serves as investment advisor to the Hodges Funds . HCM is affiliated with First Dallas Securities , Inc , a broker-dealer and investment advisor registered with the SEC . This discussion is not intended to be a forecast of future events and should not be considered a recommendation to buy or sell any security . Past performance is not indicative of future results . Investing involves risk . Principal loss is possible . Investing in smaller companies involves additional risks such as limited liquidity and greater volatility . No current or prospective client should assume that information referenced in this communication is a recommendation to buy or sell any security or is a substitute for personalized investment advice from your individual advisor . HCM does not provide tax or legal advice . Consult your tax or legal advisor for any related questions .
All information referenced herein is from sources believed to be reliable and is provided as general market commentary and does not constitute investment advice . This material was created for informational purposes only and the opinions expressed are solely those of HCM . HCM shall not in any way be liable for claims and makes no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information . The data and information are provided as of the date referenced and are subject to change without notice .
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