Mary Froeb loves to shop, but the 48-year-old nurse, who lives with her husband, a surgeon, and four children in West Hartford, Conn., doesn't spend much time browsing at department stores or flipping through catalogs. She buys mutual funds.
Since taking over her family's finances 13 years ago, she has talked with her stockbroker, devoured newspaper and magazine articles and even attended investment courses en route to creating a diversified portfolio.
"It's become a little sideline for me," she said.
Only it's not so little anymore. Over the years, Mrs. Froeb has amassed about two dozen, mostly squirreled away in various retirement accounts worth several hundred thousand dollars.
Keeping track of that many funds has become a huge chore: her mailbox is always stuffed with prospectuses, annual reports and come-ons from even more funds. She worries about losing one of the many shareholder statements, and her accountant winces when she hands him a 3-inch file at tax time.
Worse still, for all her time and trouble, Mrs. Froeb's collection of funds, each invested in scores of stocks and bonds, has not done as well as the overall market. Over the last five to six years, her portfolio, which is slightly more than half in stock funds and the rest mostly in bond funds, gained roughly 10 percent annually.
Had she simply put her money in a couple of broad stock and bond index funds, she would have gotten about 11 percent annually. While a single percentage point may not seem like a huge difference, it really adds up. Over 20 years, a $100 investment in her portfolio would grow to $673, but a 11 percent return would increase the total to $806.
The investing mantra of the '90s has been diversify, diversify, diversify. Buy a fund that invests in the emerging stock markets, add another that buys the cheap stocks of small companies and yet another that targets fast-growing large corporations, investment advisers said.
Unsure about just how to diversify their holdings and always on ** the lookout for the next big winner, many people, even those with only a few thousand dollars to invest, went on a buying binge. And the results, for those who can keep track, are disappointing.
Diversity is a valid investment goal, of course, just not when carried to an extreme. When you buy a mutual fund, you're already diversifying by investing in a group of securities. The idea is to get exposure to various segments, like domestic and foreign markets, big companies and small companies.
Piling on similar funds is not diversifying. Still, it takes some willpower to say no to today's dazzling fund assortment. Advertisements heralding a fund's impressive track record or displaying the broad smile of its star portfolio manager make a hot fund all the more appealing. Plenty of investors who own dozens of funds remain in denial about their fund habit.
Mrs. Froeb, however, identified her problem and hired a financial adviser to help streamline her portfolio. By having too many mutual funds, "you dilute the possibility of getting a substantial return," she said.
Richard Lee Jr., a financial planner in Dallas, said people with many funds wind up with a portfolio that resembles a stock index fund, which invests in a large basket of stocks and can be bought inexpensively.
"You are an index, and probably not a terribly efficient one," Mr. Lee said, describing a client who came to him with 50 to 60 funds. "He couldn't keep up with them," Mr. Lee said. "It was just a nightmare."
How do you know if you have become a fund junkie? One sure sign is that you can't keep tabs on all of your funds. David Pendleton, a 36-year-old insurance agent in Tennessee, can't name all his holdings. He has about a dozen funds through a retirement account at Fidelity, and perhaps a dozen on top of that. "You get your prospectus and annual reports, and I'll admit I don't scour them continuously," he said.
"No matter how much money you have, if you acquire too many funds, you can't possibly keep track of them," said Frederick Rafferty, a financial planner with Robert Lawrenz Consulting Services in Rockford, Ill. If you won't make sure you're abreast of major changes then consider tossing some funds.
Mrs. Froeb recalls thinking of selling health care holdings when she heard talk of reform a few years ago. She didn't -- and ended up losing money.
Another sign you own too many funds is not being able to defend your choices logically. Mary Merrill, a financial planner in Madison, Wis., remembers one retired couple who came to her with 40 funds.
"They were emotionally attached to them," said Ms. Merrill, who pried away 10. Mrs. Froeb held onto a group of John Hancock funds because she didn't want to hurt the feelings of the broker who sold them to her.
Many investors buy a lot of funds because they want to make sure they have spread their money among enough baskets. That's why Richard Silverstein, a 47-year-old dentist in New Jersey, invests in up to 30 funds. (He said he has never actually totaled them.)
Sometimes investors won't gamble on the skills of one manager. When Mr. Pendleton, the insurance agent, invests in any specific sector of the market, like small-company stocks, he picks several funds.
Mr. Wilkas, the Boston consultant, is nervous about putting too much faith in any one fund group, so he owns several money market funds and some money market accounts at different banks. "Our main failing is we have too many money market funds," he said. He is trying to rid his portfolio of some of them.