Transcripts

"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today."

SUSIE GHARIB: Our Tuesday night look at mutual funds poses a question for investors: how much diversification is good for your portfolio and how much puts you overboard? With some answers in our weekly "Of Mutual Interest" segment, here's John Waggoner, mutual fund columnist at "U.S.A. Today."

JOHN WAGGONER. MUTUAL FUND COLUMNIST, USA TODAY: If you've bought a new car recently, you know that your key not only opens your doors and windows from a distance, but can summon help, pop the trunk, and play the piccolo solo on the "Stars and Stripes Forever." If you've ever run a new key through the wash, you know that complex is not always better. For most investors, the key to success is simplicity and that means owning no more than six to 10 funds.

Most investors collect funds over time. Sometimes you get a fund portfolio through a company savings plan, such as a 401(k). Other times, you get sold a fund through a stockbroker or you buy a fund that just seems like a good idea at the time. After 10 or 20 years, you'll find yourself with a litter of a dozen or more funds. Your portfolio will just duplicate the performance of the broad stock market.

Now, being broadly diversified isn't bad, but you're probably paying too much for it. The average stock fund takes about 1.5 percent of its assets each year to pay expenses. So if your fund earns 10 percent a year, you keep 8.5 percent. The difference between 8.5 percent and 10 percent a year, over time, is enormous. A $10,000 investment will be about $175,000 in 30 years at 10 percent. At 8.5 percent, it will be $115,000, a $60,000 difference. Your best bet, keep the bulk of your investments in two or three low-cost index funds. If you want to try for higher returns, add one or two actively managed funds. It's a simple approach, but like an old- fashioned car key, it nearly always works. I'm John Waggoner.