Kevin’s Corner: Taking Stock of Your Investments

Kevin E. Donovan, CFA November 24, 2017

Investing in equity mutual funds and ETFs is an outstanding way to spread your exposure across many different stocks, industries, and countries.  It would be enormously time-consuming and expensive for investors to do all the research necessary to build a properly diversified portfolio of individual stocks, so hiring a portfolio manager by buying a mutual fund is a cost-effective, time-saving way to benefit from the expertise of many analysts and researchers working to find you the best stocks.

Some investors are content to invest in several mutual funds and not worry about what the managers actually invest in as long as performance holds up.  I think it’s interesting to look one layer deeper at the underlying stock holdings to see what is really driving performance.

As part of your annual review, we include a report called the Stock Intersection which looks at the underlying positions in all of your funds and shows in which stocks your mutual fund managers are actually investing.  It also provides the exact percentage of your account that is invested in each stock.

One of the big pitfalls of investing in individual stocks rather than mutual funds is concentration risk.  When you buy stocks on your own you usually invest in a modest number of stocks and each stock is worth a significant percentage of your overall portfolio.  If one of these stocks goes down sharply, your portfolio performance is dramatically impacted.  With mutual funds, even a small investment is spread out over many different companies, significantly reducing the risk of harm from anyone poor performer.

Holding multiple mutual funds reduces concentration risk even more.  Microsoft is the top holding for many of our clients because it is held by several different funds that we often use.  Even then, in a typical stock and bond portfolio containing our most widely-used funds, Microsoft still accounts for less than 2% of the overall portfolio.

The Stock Intersection report is interesting and helpful in several other ways as well.  For one it allows you to be more actively engaged in your portfolio and the world around you.  For instance, if you’re flipping past CNBC and see that Amazon has just posted earnings that beat expectations, you will be happy to realize that you own (through your mutual funds) a fair amount of Amazon stock.  In fact, for many of our clients, Amazon is among the largest stock holdings.  You’d also be happy to know that Amazon is up about 50% so far this year.

If you know which companies are in your portfolio you can also actively support them.  If you need to shop for some home improvement items and don’t particularly care if you go to either Home Depot or Lowe’s, you may be interested to know that Home Depot is among your top ten holdings (as it is for many of our clients) and decide to shop there.  A can of paint isn’t going to make or break Home Depot, but it certainly doesn’t hurt and it may make you feel good knowing you are contributing to your own investment performance.

I would encourage you to look at your Stock Intersection report to get a better understanding of your own stock holdings and become familiar with a few of your largest positions in order to better understand and appreciate how your mutual fund managers are putting your money to work.



See All Resources »