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Previously I have written about potential problems in diversifying one’s portfolio with funds.

The Wall Street Journal nicely illustrates three common concerns in an article today.

Are You a Secret Apple Stockholder? examines how shares of Apple permeate the investment world. You cannot seem to escape them, although I imagine that Bill Gates tries.

Companies such as Apple can pose a problem for investors attempting to diversify their investment portfolios using funds.

There are three key areas to watch out for with funds.

Do Not Invest in the “Same” Fund Twice

When buying multiple funds, you need to ensure that you are not investing in practically the same fund more than once. For example;

… an astonishing 4,100 mutual funds hold stock in Apple. (That compares to just 3,630 for Exxon and J&J and 3,200 for P&G, although the figure for Microsoft is even higher at almost 4,800.)

If you randomly purchase a fund, there is a high probability that it will hold shares of Apple.

As well as Exxon Mobil, Johnson & Johnson, Procter & Gamble, and Microsoft.

No sense buying the same fund twice and paying incremental transaction costs, operating expenses, and management fees. You are probably not getting any real diversification benefit by owning the same portfolio in a separate fund.

Always look at the core portfolio holdings in any funds you want to invest in. If you are essentially duplicating a fund you already own, give it a miss.

Be Careful of Overly High Concentrations

You might find that one investment dominates a fund’s portfolio holdings.

Or you may discover that you have an overexposure to one investment when you look at the cumulative holdings in all your funds.

… many of the funds holding Apple are making very big bets on the stock on your behalf: More than 750 of them have invested at least 5% of their entire portfolio in this one stock.

… more than 100 mutual funds have invested more than 10% of their assets in Apple.

If you think this only applies to mutual funds, think again. It is also true for exchange traded funds.

… Apple alone accounts for more than a fifth of the widely followed Nasdaq 100 Index.

Always monitor your fund holdings for too high a concentration in any one investment. Review within a single fund, as well as cumulatively between all funds you own.

Different Investment Styles May Not Save You

Even if you vary your funds between different investment styles you may still have problems.

Without conducting a comprehensive analysis of all 4100 funds, I quickly looked and saw that Apple is a top 10 holding in many, many different styles. Some that may not appear warranted.

Apple can be found in funds that differentiate by:

  • Capitalization: mega cap, large cap, mid cap funds.
  • Industry: global titans, global tech, U.S. tech, emerging tech, new economy.
  • Geography: U.S., world, global.
  • Investment strategies: value, growth, blended, momentum, balanced, market neutral,
  • Type of return: capital appreciation, income, dividend, tax managed.
  • Stock index: NASDAQ 100, S&P 100, S&P 500, S&P 1500, Russell 1000, Russell 3000.

Some styles make sense – U.S., technology, capital appreciation, NASDAQ 100, etc.

But it may not make sense that Apple can be both a mega cap and a mid cap company.

Or both a value and a growth stock.

Nor does it make sense that Apple is a top 10 holding in certain income and dividend funds. Especially since Apple stopped paying dividends back in 1995.

And I am certain if I reviewed all 4100 mutual funds, I would find other interesting contortions from fund management to justify their investments in Apple.

Be careful when selecting investments.

Even if you are mixing your investment styles to diversify, always review core holdings.

Your definition of mid cap, value, or dividend stocks may differ from a fund manager’s.

Contortions in logic come easy for fund managers. Very much so for a stock like Apple that is up 58.5% over the last 12 months versus the S&P 500 increase of 12.5%.

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