By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) -- Don Phillips, managing director and president of fund research at investment researcher Morningstar Inc., told me in the mid-1990s that investors could effectively build a portfolio using between five and 12 mutual funds.
At the time, the Morningstar /zigman2/quotes/209325896/composite MORN -0.89% style box -- which classifies funds by investment style and asset type -- was becoming a dominant force in the fund world, and diversified investors were thinking they needed to fill every box several times to spread their money around correctly.
Market Ends the Month With More Gains
But will June bring more reasons for optimism? Sam Stovall, chief investment strategist for Standard & Poor's Equity Research, talks to Kelsey Hubbard about what the future might bring. (May 29)
Phillips, however, did not seem to be living his own advice, as his personal portfolio then included about two dozen funds.
So I revisited the question with Phillips from the stage of the Morningstar Investor Conference in Chicago last week, as part of the fund research round table, and his answer was shocking:
Phillips has 62 mutual funds in his portfolio. That's no typo. Five dozen -- plus two.
The reaction from the crowd was that Phillips, one of the most powerful figures in the financial services industry, doesn't have a portfolio -- he has a collection.
Find a balance
But Phillips also acknowledged another approach -- that just one fund can be enough, "if it's the right one."
And somewhere between the minimalist one-fund-is-your-portfolio approach and the hobbyist's massive collection is the right number for the average investor.
Ironically, in finding that right number, you can learn from Phillips' experience, because while 62 funds sounds like a mess, there's a method to the madness.
For starters, Phillips didn't actually pull the trigger on all 62 funds. A Morningstar Associates program picks funds in one plan he is involved with, and Morningstar Investment Services picks the issues he holds in a mutual-fund wrap account.
In each case, Phillips wanted to taste the home cooking, and the company's decision-making programs picked 27 of the funds he currently owns. Still, that leaves 35 funds on which he makes investment decisions.
Obviously, as a top dog at a large, successful financial company, Phillips isn't hurting financially. Roughly one third of his personal portfolio is in Morningstar stock and stock options and the like. Another third is in bond funds, and here, Phillips is no collector, using just four low-cost Vanguard funds to get the job done.
"Morningstar itself is heavily tied to the equity market, so when I started diversifying -- and I admit I should have done that sooner -- I wanted low-cost bond funds, because costs matter in bond funds probably more than anywhere else," he said.
Phillips follows similar thinking with the last third of his assets -- the stock portion. There - among 31 funds -- is a core portfolio of low-cost Vanguard index funds and some exchange-traded funds based on Morningstar indexes (more home cooking), which cover the basics.
After that, however, comes the collection -- a mix of famous names and managers: