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How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?

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  • Edward S. O'Neal

Abstract

Can investors receive diversification benefits from holding more than a single mutual fund in their portfolios? Simulation analysis shows that the time-series diversification benefits are minimal but that the expected dispersion in terminal-period wealth can be substantially reduced by holding multiple funds. Portfolios with as few as four growth funds halve the dispersion in terminal-period wealth for 5- to 19-year holding periods. In addition, downside risk measures decline as funds are added to portfolios. These advantages to multiple-fund portfolios are especially meaningful for investors funding fixed-horizon investment goals such as retirement or college savings.

Suggested Citation

  • Edward S. O'Neal, 1997. "How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?," Financial Analysts Journal, Taylor & Francis Journals, vol. 53(2), pages 37-46, March.
  • Handle: RePEc:taf:ufajxx:v:53:y:1997:i:2:p:37-46
    DOI: 10.2469/faj.v53.n2.2070
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