Mutual Fund Morning: Perfect 10s of Diversification

"Diversification" is the first word investors considering mutual funds are likely to hear from a financial adviser. And it makes sense. "Don't put all your eggs in one basket" is one of the earliest lessons in economics for many of us.

So which are the most diversified mutual funds? There are a number of ways to gauge diversification. One would be to simply count the number of stocks in a fund's portfolio. The problem with this is that no matter how many stocks a fund holds, its true diversification is limited if they all have similar characteristics. For example, in the late 1990s, a fund loaded solely with tech start-ups would likely have met an unfortunate fate no matter how many of these stocks it held.

So a potentially more useful measure of a fund's diversification would be the number of distinct sectors represented in its holdings. Using that logic, TheStreet.com Ratings has studied the dispersion of sectors within open-end stock funds. These are: ...