Avoiding Overlap When Building a Portfolio

Investments often come in different shapes and packages, but many have similar content. For instance, two seemingly different mutual funds can own the same stocks. In September 2012, for example, the top 10 holdings of two separate Fidelity funds had five stocks in common.

There's nothing wrong with such portfolio overlap per se, and there's no saying that two funds with heavy overlap at the top can't ever be complementary. However, any time you see that much redundancy in two fund's top 10 lists, you may want to ask yourself if you're using two investments to do the job that one could do just as well. And, if both funds emphasize large positions in the same names, you may have built a portfolio that's overly dependent on a few stocks. Overlap flies in the face of diversification.

Read Next: How You Can Avoid Overlap

Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) or mutual fund carefully before investing. A prospectus contains this and other information and should be read carefully before investing. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. An ETF prospectus must be obtained from the issuer.

Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.