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As the Isa deadline approaches, investors may be reviewing their portfolios and wondering what to add before the end of the tax year.
A share of Isa can form the basis of your investment portfolio and give you the freedom to choose where you invest your money.
But with so many funds and trusts on offer, it’s an overwhelming choice. One of the top questions investors often have, whether they are newbies or seasoned, is how much money they should hold.
We speak to three experts about whether there is an ideal number, and whether they follow their own advice when it comes to their personal portfolios.
A diversified portfolio can help increase returns – but what is the ideal number of funds to hold?
‘Don’t be a magpie’
You may be looking at your portfolio and wondering what you can add to boost your returns before the six-week deadline.
But there’s a risk of getting too excited and adding funds and trusts without really knowing what’s under the hood.
Tom Stevenson, director of investment at Fidelity says, “If you find it easier to add new ideas than to prune deadwood, you may find yourself holding too much money.”
Investors can tend to get carried away with investing in exciting new assets, regions or sectors. This has been particularly the case in recent years due to market volatility, which has seen some asset classes perform unexpectedly well.
David Henry, investment manager at Quilter Cheviot says: ‘The mistake I sometimes see with people who manage their own portfolios on a do-it-yourself basis is that they become financial magpies: they buy new holdings depending on what shiny investment in works for a certain period, or which fund is currently at the top of the best buy lists.’
It’s something most investors are guilty of at some point in their investment journey, but it can lead to a poorly balanced portfolio.
“If you unwittingly end up with a bunch of funds that all have a similar style, your portfolio could be pointing in the same direction instead of being well diversified,” says Henry.
Diversification is a point asset managers like to stress, and while it doesn’t guarantee investment returns or eliminate losses, it’s important to mitigate risk where possible.
Henry adds, “When managing other people’s money, we have to be disciplined enough to add positions to a portfolio that we may not be thrilled about, or that may not match our ‘base case’.”
“The reason we’re doing this is to recognize that our baseline scenario could be wrong and it’s important to hedge risk in that case.”
>> For help getting started, read our How to invest in an ISA guide
How to build your portfolio when you’re just starting out
Once you take a look at what your portfolio is, you’ll quickly find out what’s missing.
If you’re just starting to invest and aren’t sure how to diversify, putting your money into a fund or trust is a good place to start.
Quilter’s David Henry prefers a ‘less is more’ approach
There are many funds and trusts on offer, which can be overwhelming, but there are ways to narrow down the choices depending on what you’re investing for.
Another step to help you narrow down your options is to think about the type of vehicle you want to invest in, but also keep in mind that you can have a combination of both.
In an open-ended mutual fund, investors buy and sell units directly from the manager, who issues or withdraws units in accordance with investor demand.
There is no limit to the number of units that can be spent at any one time, and the number of units goes up and down according to demand.
>> Experts share their last-minute fund and confidence tips for investors looking for income and growth
Mutual funds, which are closed, are investment companies in their own right and are listed as such on the stock exchange. A fixed number of shares are offered, so that the price fluctuates more.
John Moore, senior investment manager at RBC Brewin Dolphin, says depositors new to investing can start with “some general passive investments and maybe one or two trusts or funds you’ve researched and feel comfortable with.”
More than ever, investors are looking for low-cost funds that track the performance of specific stock market indices, such as the FTSE 100 and the S&P 500.
Moore suggests that inexperienced investors look at the iShares Government Bond ETF, which offers diversified exposure to global government bonds, and the FTSE Developed World Equity ex-UK Equity Index, which focuses on the largest companies outside the UK.
Vanguard LifeStrategies are another popular low-cost option, offering a mix of bonds and stocks under one hood.
Moore adds: ‘With three [funds] may also be useful from a capital gains tax perspective as the tax-free allowance for gains approaches in the tax year and then again in 2024/25.”
If you’re planning to invest in active funds, Moore suggests looking at household names like Fundsmith and Lindsell Train as a good starting point.
“They can be combined with funds that focus more on preserving your capital over the long term, such as Personal Assets and Trojan Fund, which have some exposure to equities, but combine it with assets such as gold.”
Henry believes younger investors should prioritize growth over value as they have a longer time horizon to achieve returns.
>> Learn where David Henry puts his money and some of his biggest investment mistakes
How many funds should investors hold?
If you have more investing experience, you may feel more confident about expanding your portfolio further away from passive trackers and active strategies.
But as the experts have said, there’s a risk of getting overexposed and losing track of where your money is.
If you look at every fund, trust or ETF you own, they will invest in at least 20 stocks and possibly more.
Fidelity’s Tom Stevenson has 10 funds in his own portfolio
“If you own 20 funds or more, you could own hundreds or even thousands of underlying stocks, even assuming there could be significant overlap between funds,” says Stevenson.
So how many funds should investors hold?
It’s not an exact science, but the number of positions depends on your experience and the size of your portfolio.
Stevenson says: ‘For an experienced investor, with a large portfolio of over £100,000, somewhere between 10 and 15 funds should be more than enough to provide adequate diversification.
Advisors typically recommend that your minimum fund size be at least 5% of your portfolio, so that’s £5,000 invested in a single fund in the case of a £100,000 portfolio.
“It may also be wise to limit exposure to a single fund to no more than 15 percent of your total portfolio.”
Henry is less sure and doesn’t think there is a ‘perfect’ number of holdings in a portfolio, although research shows that the optimal combination of individual stocks is between 30 and 35.
‘The benefits of further diversification then quickly disappear.’ he says. “So if you only have a few collective funds, if you understand what they entail, you can provide more than enough diversification during the building phase of your life – without having to spend a lot of time monitoring your portfolio.”
Where the professionals put their money
The experts may be able to tell investors what to do with their money, but are they actually doing what they preach?
We asked our experts what their portfolios look like and their sweet spot for the number of holdings.
Their answers show how differently the experts approach their own portfolios, depending on their age and their goals.
Stevenson says: “My personal retirement portfolio is spread across ten funds and I believe I have reasonable exposure to different asset classes and geographies.
Brewin Dolphin’s John Moore prefers a larger portfolio
While it’s important to have a mix of styles and strategies to achieve diversification, that doesn’t mean you need a long, unwieldy list of funds. Plus, having a personal cap on the amount of money in your portfolio ensures that when you see an attractive new fund idea you want to add, you can reassess your portfolio and remove the weakest link.”
Moore has a slightly larger portfolio and usually has between 12 and 20 different funds that he divides between core holdings and specialty holdings.
‘In the [core]at various times I have had names such as Lindsell Train, Personal Assets, Trojan, JP Morgan American, Odyssean Investment Trust, Blackrock European Dynamic, Fidelity Special Values, Pacific Assets, First State Asia Pacific Leaders, Mid Wynd Investment Trust, Monks Investment Trust, Templeton Emerging Markets, BH Macro and Greencoat UK Wind.
“In the specialist camp are people like North Atlantic smaller companies who invest in companies that the manager thinks are undervalued.”
He has also invested in a mix of private equity trusts, Liontrust Micro Cap, which focuses on small UK listed companies, and some trusts that invest in frontier markets.
As a younger investor, Henry’s priorities are slightly different and he takes a ‘less is more’ approach and invests in just four funds.
‘It is important to have your affairs in order as much as possible and to spend as little time as possible on your portfolio when you are young. Time that in my opinion is better spent on your career and maximizing your human capital and earning potential.’
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