Protect Your Portfolio from Overlap

Investors own mutual funds, in part, to create a diversified portfolio that includes a number of asset classes and securities. But in their effort to diversify, some may inadvertently have invested in many of the same asset classes and securities. This overlap could result in a portfolio that is inconsistent with their financial goals and risk tolerance.

How does overlap occur? Your funds could hold some securities in the same asset class, such as large-cap stocks. And they could even hold some of the same securities.

To detect overlap, you could look at the top 10 holdings for each fund you own (generally available in shareholder reports and fact sheets), determine the asset class for each holding, then see if there is any repetition among asset classes and securities. Or you could ask your advisor.

Your advisor may not be aware of all your holdings, and therefore would be unable to spot duplications. You can save your own time and energy, by asking him or her to help you sort through your portfolio to find any potential overlaps.

Ideally, you will already have a target asset allocation, or target mix of asset classes and sectors. If you or your advisor uncover any asset class overlap in your portfolio, you may want to take steps to correct it. He or she likely will recommend you gradual shift investments into asset categories and industries where you need to increase your exposure.

To prevent future overlap, you should be careful not to purchase a mutual fund or stock without considering its effect on your overall investment strategy. Even if you don’t make changes, you and your advisor should probably check your portfolio regularly for overlap resulting from market changes.

Your focus should be on your long-term financial goals. Build an annual portfolio checkup into your plans to ensure against overlap.