When you invest in a mutual fund in your 401k, IRA or even in a non-retirement account you normally buy it because it represents a certain market cap (large cap, mid cap or small cap) or market sector (consumer, technology, real estate, utilities, etc.). As you know, mutual funds are a pool of dozens, or sometimes hundreds, of stocks. It’s critical to have at least some idea of what stocks are in your mutual funds for the sake of understanding your true diversification and risk.
For example in my retirement portfolio I own Fidelity’s S&P 500 Index (FUSVX). Its top ten holding are (as of 6/24/2017):
- Apple (AAPL) – 10.78%
- Microsoft (MSFT) – 6.04%
- Amazon (AMZN) – 5.34%
- Facebook (FB) – 5.31%
- Exxon Mobil (XOM) – 4.91%
- Johnson & Johnson (JNJ) – 3.91%
- Berkshire Hathaway (BRK.B) – 1.52%
- Alphabet A (GOOGL) – 1.33%
- Alphabet C (GOOG) – 1.30%
I also own Powershares QQQ ETF (Nasdaq Index ETF) . Its top six holdings are:
- Apple (AAPL) – 11.99%
- Microsoft (MSFT) – 8.07%
- Amazon (AMZN) – 7.10%
- Facebook (FB) – 5.34%
- Alphabet C (GOOG) – 5.01%
- Alphabet A (GOOGL) – 4.39%
As you can see there is a lot of overlapping here. In fact Apple, Facebook*, Google and Microsoft make up over 12% of my retirement account. A 10% drop in those stocks would equate to an -1.2% drop in my entire portfolio. The inverse is also true, my 401k overall has benefited greatly from the stellar performance of these Tech stocks.
I’m not comfortable with so much of my 401k so heavily weighted to just four stocks. Also, these four stocks are in the same sector (Tech) and the heavy concentration increases risk inside my portfolio. My next steps are to move a portion of my portfolio out of index funds and into individual stocks. The stocks I select can’t be Tech stocks since I need to diversify out of that sector, but hopefully the will have the same growth potential. Hopefully I’ll be able to construct a portfolio that is able to outperform the S&P 500, which is my ultimate goal.
I advise you to do the same and research what stocks are in your mutual funds. It’s extremely easy to do, you can find the top holdings of a mutual fund or ETF via finance websites like Yahoo Finance! or Morningstar. Then with a little math you’ll be able to determine if your over allocated to any one stock or sector. Its always best to know where your money is invested, you don’t want to be caught slippin when the next downturn hits the market.
*I also own individual shares of FB in my 401k.