If you spend more than an hour each week tracking your mutual funds, you may have too many. So says Richard Moroney, editor of the weekly newsletter Dow Theory Forecasts.
So how do you figure out just how many mutual funds to maintain? "If you consider conventional wisdom, you should have one or two mutual funds for each asset class," says Moroney. "You need to decide how much you want in [domestic] stocks and bonds and in international stocks. That's the first decision and from that will flow others. You also want good growth, small-company and junk bond funds as well as [a short-term bond]."
When deciding which funds to keep and which to toss, Moroney advises examining each one to see whether the reason you purchased it is still valid. Also, compare performance to expenses. If the return is only fair and the expenses are high, find a stronger fund in the same category.
Next, consider what percentage of your investment expenditures will be in each fund. "In general, there's not much reason to have less than a 10 percent investment in a fund," says Moroney. "A 10 percent minimum is a way to make sure you really like the fund."
Another evaluator to use is fund management style, says Moroney. "Be wary of funds that flip from one approach to another," he says. "The best managers stick with a consistent approach."
After you complete your review, Moroney advocates keeping no more than eight funds. However, this is not an iron-clad rule and can be modified, especially if you have a large portfolio or enjoy tracking multiple funds.