Do You Really Know What You Own?

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Do you really know what you own?

Most folks do when it comes to stocks, even if their portfolios were put together without much of a plan. But when it comes to the mutual funds in your 401(k) or 403(b) plan, you might not really know what you have -- and that can be a big problem.

Fewer baskets for your eggs
The "big problem" is a simple one: You might be less diversified than you think. You may be holding several different stock funds, but those funds may have big positions in the same small set of stocks -- even if the funds say they have wildly different investment strategies.

Consider the following four Fidelity funds. According to their prospectuses:

  • Fidelity OTC Portfolio (FOCPX) focuses on stocks traded on NASDAQ or other "over-the-counter" markets, with at least 25% of its assets in tech stocks.
  • Fidelity Blue Chip Growth (FBGRX) mostly holds stocks that are listed in the S&P 500 (INDEX: ^GSPC) or the Dow Jones Industrial Average (INDEX: ^DJI) and have market caps over $1 billion and some growth potential.
  • Fidelity New Millennium (FMILX) looks for "early signs of long-term changes in the marketplace" and "companies that may benefit from opportunities created by these changes," "which can lead to investments in small and medium-sized companies."
  • Fidelity Growth Company (FDGRX) buys companies that the manager "believes have above-average growth potential." Plain and simple.

While they're all stock funds with a growth-ish focus, they certainly sound very different from one another, don't they? But consider this: Three of those funds have their largest position in the same stock -- and that stock is the second-largest position in the fourth.

The stock? Apple (NAS: AAPL) .

You see the problem?

Actually, it's worse than that
Three of the funds have Google (NAS: GOOG) in their top five holdings. Three (not the same three) also have ExxonMobil (NYS: XOM) in their top five -- in fact, it's the top holding in New Millennium (you didn't know that oil was such a disruptive new technology, did you?). Three have Qualcomm (NAS: QCOM) in the top 10, where two have Amazon.com (NAS: AMZN) , and two have Oracle (NAS: ORCL) .

The problem isn't the stock selection in any one of the funds -- those have all been good companies to own. And this isn't a cherry-picked example, or a problem limited to Fidelity -- these are the first four funds I looked at when I was searching for an example for this article, simply because they popped up together on a list on Fidelity's site. The problem is that mutual funds, by their nature, gravitate to whatever the "good" stocks are in any given moment -- and in big funds, the biggest positions are going to tend to be large-cap stocks. That doesn't mean you should avoid funds -- not at all -- but it does, understandably, make for a small universe of top holdings among funds with broadly similar objectives.

But imagine if you had a couple of these funds, maybe along with an S&P 500 index fund or ETF like SPDR S&P 500. Do you happen to recall the names of the two biggest stocks in the S&P 500?

ExxonMobil and Apple.

Nobody's saying those are bad stocks to own. Apple's iProducts, Amazon's Kindle, and Google's Android are all amazing innovations that will shape how people communicate and share information far into the future. Technology from companies like Oracle and Qualcomm underlie many of those innovations. And ExxonMobil is at the forefront of energy trends that will define the future for decades.

But when you own those stocks nearly everywhere in your portfolio, you have to ask one question: Are you sure you're really diversified?

Buying the index, over and over
As Foolish retirement guru Robert Brokamp points out in the new issue of Rule Your Retirement, available online at 4 p.m. ET today, Apple's top four shareholders are all fund companies. That's not a bad thing (or an unusual one), but it's one more illustration of the problem: Your portfolio may have a lot more overlap than you realize.

We all know that diversification is key to reducing the risk exposure of your portfolio over time. But as Brokamp notes in his article, this is something you have to watch. Mutual funds stray from their objectives, reinvested dividends and a topsy-turvy market can knock even the most carefully allocated portfolio out of balance, and investments in different accounts -- or accounts controlled by spouses who don't always coordinate strategy -- can create situations that expose your retirement nest egg to more risk than you'd intended.

Brokamp's article offers some great strategies for staying on top of this without having to invest a whole lot of time, including links to some tools that can make this essential job a lot simpler. If your portfolio consists of more than a fund or two, I strongly urge you to check out the article and take a look at your holdings. Rule Your Retirement is a paid service, but you can get full access to Brokamp's article and all of the service's great content free of charge, with a no-obligation 30-day trial. Just click here to get started.

At the time this article was published

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