How Many Funds Do You "Need"?

What about ETFs and mutual funds? How many funds do you need to have a well-diversified portfolio?

The answer is—you guessed it—it depends. Some funds, such as target-date funds, can deliver a lot of diversification in one package by providing exposure to stocks and bonds as well as U.S. and foreign securities. Some sources believe it's possible for investors to obtain adequate diversification by buying a single target-date fund.

Meanwhile, an investor could build a 10-fund portfolio and still not achieve adequate diversification if all the funds focused on a similar part of the market. That may sound farfetched, but it was actually the case in the late 1990s, when many investors amassed multi-fund portfolios with a strong bias toward growth stocks, especially technology names. Seven large-growth funds simply won't diversify a portfolio the same way owning one large-blend fund, one small-value fund and one small-growth fund could.

Read Next: What an Investor Really Needs: Diversification

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 may be ordered through www.scottrade.com or through a Scottrade branch office. An ETF prospectus must be obtained from the issuer.