Larry Swedroe Explains the Need to Diversify across Mutual Fund or Exchange-Traded FundLarry 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