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When Diversification Is Just an Illusion: A Look Inside Your Mutual Funds

MarketDash Editorial Team
12 days ago
Think you're diversified because you own multiple mutual funds? You might be surprised to discover you're holding the same handful of tech stocks over and over again. Here's how to actually protect your portfolio when the market corrects.

"I have no idea whether or not we are in a bubble, nor does anyone else. But here is how you can protect your portfolio when the market does correct, and it will."

Everyone's talking about bubbles these days. Are we in one? Is it about to pop? Should we panic?

Here's the honest answer: nobody knows. Not the experts, not the talking heads on television, and certainly not the people writing articles about it. LCM Capital Management isn't in the prediction business, and frankly, no one else should be either. Market forecasts are essentially educated guesses that are wrong more often than they're right.

The bubble question has gotten so pervasive that after Nvidia's (NVDA) most recent earnings report, CEO Jensen Huang was asked whether he thought we were in an AI bubble. Think about that for a second. How's he supposed to answer? Only in hindsight will we know if we're in a bubble right now.

But here's what 37 years in this business has taught me: the best protection against a market correction isn't predicting when it will happen. It's being properly diversified when it does. And no, I'm not about to pitch you on private credit or Bitcoin.

The Diversification Myth

You might be thinking, "I'm already diversified. I own multiple mutual funds from different companies, and I even work with several brokers and advisors." That sounds good in theory, but it's not enough. Here's a real-world example that illustrates exactly why you need to look under the hood of your investments, especially if you own mutual funds. And remember, if you own a variable annuity, you almost certainly own mutual funds too.

A client recently switched jobs and sent us her new 401k plan's investment options for review. My first question was whether there were additional pages, because the choices were disappointingly limited. This didn't shock me or my partner since we routinely see 401k plans with underwhelming fund selections and way too many target date funds.

The plan was managed by Voya, one of the large insurance providers. To their credit, it wasn't exclusively Voya funds, though they did include Voya Target Date funds, which strikes me as a conflict of interest. But I'll save that rant for another day. Most 401k providers include their own target date funds, which doesn't make it right or better, just common. The plan offered funds from Vanguard, JP Morgan, American Funds, Fidelity, and Dodge & Cox, among others.

At first glance, it looks great. Plenty of choices. Multiple fund families. Easy path to diversification, right?

Wrong.

What's Really Inside Those Funds

When you dig deeper into what these funds actually hold, you realize you're anything but diversified. According to Morningstar data, the top 10 holdings in some of these funds represent anywhere from 23% to over 60% of the fund's assets. We're talking serious concentration here. And it's not like these funds only hold 20 stocks—they hold 50 to 200 or more. So why are the top 10 so dominant?

Peel back the onion even further and look at what these funds are actually invested in. You'll find: Nvidia (NVDA), Microsoft (MSFT), Meta (META), Apple (AAPL), Alphabet (GOOGL), Broadcom (AVGO), Amazon (AMZN), Eli Lilly (LLY), and Netflix (NFLX).

The only difference? The percentage that each fund allocates to these stocks.

Full disclosure: my firm owns these stocks for our clients, and frankly, you probably should own them too. They're excellent companies. But here's the key: you should only own them once. Owning them within different mutual funds at different brokerage firms isn't diversification. It's redundancy masquerading as strategy.

This is one of many issues I have with mutual funds, which is precisely why we don't buy them for our clients.

Real Protection When the Market Corrects

If you want to genuinely protect your portfolio when the market corrects—and it will correct eventually—you need to look inside your mutual fund holdings. Make sure you're truly diversified, not just diversified in name only.

The market will have its ups and downs. That's guaranteed. What's not guaranteed is that your portfolio structure will protect you when the downturn comes. Don't assume that owning multiple funds from multiple providers means you're covered. Do the homework. Check what you actually own.

There is a better way to invest.

Back to News

When Diversification Is Just an Illusion: A Look Inside Your Mutual Funds

MarketDash Editorial Team
12 days ago
Think you're diversified because you own multiple mutual funds? You might be surprised to discover you're holding the same handful of tech stocks over and over again. Here's how to actually protect your portfolio when the market corrects.

"I have no idea whether or not we are in a bubble, nor does anyone else. But here is how you can protect your portfolio when the market does correct, and it will."

Everyone's talking about bubbles these days. Are we in one? Is it about to pop? Should we panic?

Here's the honest answer: nobody knows. Not the experts, not the talking heads on television, and certainly not the people writing articles about it. LCM Capital Management isn't in the prediction business, and frankly, no one else should be either. Market forecasts are essentially educated guesses that are wrong more often than they're right.

The bubble question has gotten so pervasive that after Nvidia's (NVDA) most recent earnings report, CEO Jensen Huang was asked whether he thought we were in an AI bubble. Think about that for a second. How's he supposed to answer? Only in hindsight will we know if we're in a bubble right now.

But here's what 37 years in this business has taught me: the best protection against a market correction isn't predicting when it will happen. It's being properly diversified when it does. And no, I'm not about to pitch you on private credit or Bitcoin.

The Diversification Myth

You might be thinking, "I'm already diversified. I own multiple mutual funds from different companies, and I even work with several brokers and advisors." That sounds good in theory, but it's not enough. Here's a real-world example that illustrates exactly why you need to look under the hood of your investments, especially if you own mutual funds. And remember, if you own a variable annuity, you almost certainly own mutual funds too.

A client recently switched jobs and sent us her new 401k plan's investment options for review. My first question was whether there were additional pages, because the choices were disappointingly limited. This didn't shock me or my partner since we routinely see 401k plans with underwhelming fund selections and way too many target date funds.

The plan was managed by Voya, one of the large insurance providers. To their credit, it wasn't exclusively Voya funds, though they did include Voya Target Date funds, which strikes me as a conflict of interest. But I'll save that rant for another day. Most 401k providers include their own target date funds, which doesn't make it right or better, just common. The plan offered funds from Vanguard, JP Morgan, American Funds, Fidelity, and Dodge & Cox, among others.

At first glance, it looks great. Plenty of choices. Multiple fund families. Easy path to diversification, right?

Wrong.

What's Really Inside Those Funds

When you dig deeper into what these funds actually hold, you realize you're anything but diversified. According to Morningstar data, the top 10 holdings in some of these funds represent anywhere from 23% to over 60% of the fund's assets. We're talking serious concentration here. And it's not like these funds only hold 20 stocks—they hold 50 to 200 or more. So why are the top 10 so dominant?

Peel back the onion even further and look at what these funds are actually invested in. You'll find: Nvidia (NVDA), Microsoft (MSFT), Meta (META), Apple (AAPL), Alphabet (GOOGL), Broadcom (AVGO), Amazon (AMZN), Eli Lilly (LLY), and Netflix (NFLX).

The only difference? The percentage that each fund allocates to these stocks.

Full disclosure: my firm owns these stocks for our clients, and frankly, you probably should own them too. They're excellent companies. But here's the key: you should only own them once. Owning them within different mutual funds at different brokerage firms isn't diversification. It's redundancy masquerading as strategy.

This is one of many issues I have with mutual funds, which is precisely why we don't buy them for our clients.

Real Protection When the Market Corrects

If you want to genuinely protect your portfolio when the market corrects—and it will correct eventually—you need to look inside your mutual fund holdings. Make sure you're truly diversified, not just diversified in name only.

The market will have its ups and downs. That's guaranteed. What's not guaranteed is that your portfolio structure will protect you when the downturn comes. Don't assume that owning multiple funds from multiple providers means you're covered. Do the homework. Check what you actually own.

There is a better way to invest.

    When Diversification Is Just an Illusion: A Look Inside Your Mutual Funds - MarketDash News