Larry Swedroe Explains the Need to Diversify across Mutual Fund or Exchange-Traded Fund
Larry Swedroe of CBS MoneyWatch.com, answered one of the more frequently asked questions I get is about the need to diversify across mutual fund or exchange-traded fund providers.
Is
there risk in having all your eggs in one fund family's basket? This
question became even more prevalent after the Bernie Madoff fraud was
exposed.
We'll
begin to address this issue by first discussing how to think about
diversification of financial assets. If you use diversified, actively
managed funds, you still have idiosyncratic manager risk. So, you should
at the very least consider diversifying that risk.
With
passively managed funds, such as index funds, that risk isn't present.
It doesn't matter which fund family's S&P 500 index fund you own,
because except for the expense ratio, the returns of all S&P 500
index funds should be virtually identical.
The
same is true for index funds in other asset classes. With index funds,
diversification is about the assets in the funds, not who is managing
them. That holds for other passively managed funds or "structured
funds," such as the three fund families my firm Buckingham uses, AQR,
Bridgeway and Dimensional Fund Advisors (DFA). Their structured
portfolios are all rules-based: No real human judgment is being employed
regarding market timing or individual stock selection, except with the
small amount of block trading they might engage in.
Source: CBS News
