Hidden Danger: Different Funds, Same Stocks

A 54-year-old woman recently asked me this question: "I have $70,000 invested in four funds, (FEQIX Quote)Fidelity Equity-Income, (FCNTX Quote)Fidelity Contrafund, (FASMX Quote)Fidelity Asset Manager and the (FSMKX Quote)Fidelity Spartan Index 500. Is this a good portfolio?"

This investor's question is a common one from newcomers. It's not a good portfolio because too much overlap exists among these funds. Indeed, one of the chief mistakes investors make is to buy the same securities over and over again in different funds with different names. They then believe they're diversified.

Investors often think of funds as brand labels, such as Crest toothpaste or Tide, and they buy them as if the name represents something. That's a big mistake. Fund names are devised by the marketing folks at fund companies to appeal to your emotions, to convey strength or excitement or boldness or stability. It's your responsibility to find out what's really under the hood.

Similar Holdings, Similar Returns

I looked up these four funds and what I uncovered didn't surprise me much: The funds have similar holdings and have gotten similar recent returns. ...