One of the keys to long-term capital protection and growth is creating a portfolio that is diverse enough to steer you through rocky times. Therefore, investing money in just a couple of names could increase the level of risk you are taking.
However, if you hold a large number of funds in your ISA, a fund that is performing well will have a minimal impact on your overall returns.
Let’s say you held just 2 per cent of a £100,000 portfolio in the best-performing fund of 2012 – Standard Life UK Equity Unconstrained. Although the fund saw impressive returns of 42 per cent in 2012, your portfolio would have only picked up £882.85 over the course of the year – and if many of your other investments performed poorly, this gain would hardly offset their fall. On top of that, having a huge variety of funds could increase the cost of dealing.
There is no doubt it is difficult to balance diversification and concentration and, judging by the results of FE Trustnet's most recent poll, many of our readers feel the same way.
The results showed that out of the 1,318 people who took part, there was a roughly even split between those who held zero to five funds, six to 10 funds, 11 to 15 or 15 or more funds in their ISA.
Since our readers were so evenly split, we turned to the experts to find out what they do with their own money and how many funds they hold in their own portfolios.
Mike Deverell, investment manager at Equilibrium Asset Management
Number of funds: 20 plus
"Off the top of my head I have around 20 holdings in my portfolio," he said.
"We are also a discretionary management firm here at Equilibrium Asset Management, so I use our model portfolio service. I am 36 so am relatively young and therefore I can afford to take a higher degree of risk."
"I am in our speculative model, which is heavily skewed towards equities, but it also has some fixed interest, property and other alternatives."
"Those are many collectives, but I hold a number of ETFs (exchange traded funds) and one structured product."
"I don’t have a huge amount in my ISA; I mean it isn’t a big pot. However, by using the model portfolio, I can still have exposure to 20 funds or so and not have to pay for all the dealing costs."
"I think it is also important that I use our model portfolios because as an investment manager, it is important that I back my own decisions. It’s like when you invest in a fund manager, you want to make sure he has money in his own fund so that he is happy to back his convictions."
Chris Wise, investment director at Gemmell Financial Services
Number of funds: Eight
"For my own portfolio, I’ll take a bit more of an aggressive approach than I would for some of the clients I look after," Wise said.
"That means that my ISA is a bit more concentrated because currently I have a core holding of just eight funds. Basically, that includes funds like Schroder US Mid Cap, emerging markets and I still run resources funds in my portfolio."
"I just like to take slightly more risk. For instance, although I think they are very good managers, I wouldn’t use the Cazenove Multi Manager range as I don’t want too broad an exposure. Instead, I have a portfolio of global equities – US, UK, Europe and emerging markets – for potentially high long-term returns."
"Obviously, it is a concentrated number of holdings but I think I am still diversified to a certain extent because I hold equities spread across the globe."
Paul Warner, managing director at Minerva Fund Management
Number of funds: Six and 40 per cent cash
"I hold a small SIPP and within that there is 40 per cent cash and six UK equity income funds," Warner said.
"The reason I am holding that amount of cash is because of the total uncertainty of this great economic experiment that is QE and how it will all unfold. Basically, cash is frustrating because it is not paying you anything at all."
"However, markets have raced ahead recently and the question is, can they go much further? In my opinion, I don’t think they can. Earnings are not fantastic and we will need an improvement for markets to go higher."
"But, I’ve always been a big believer in income funds. Apart from the potential for growth of income, I saw that if you had bought M&G Dividend back in the 1970s you would have seen the equivalent yield of something like 90 per cent."
"Me personally, I think you are better off putting your money in a fund like that and forgetting about it instead of buying an annuity."
"Also, with income funds, because of their income mandate, they have to sell things that are in vogue. They have to follow the strategy of selling high and buying low to deliver high long-term returns," he added.
