5. Manage your sector weightings. If two funds from the same category sport similar sector weightings, they may own many of the same stocks.
6. Determine how much overlap you might have. You've followed these tips and have put together a portfolio of investments or possible investments. To test for overlap, you could enter all of the investments -- both the stocks you've bought directly and every stock that your mutual funds own -- into a spreadsheet and sort by stock name. That's a lot of work. Morningstar.com offers a Portfolio X-Ray feature that can do this overlap analysis for you. (Note that Portfolio X-Ray is a feature available only to Morningstar.com Premium Members, but you can take advantage of a free 14-day trial.)
Using Morningstar.com's Portfolio X-Ray
Let's say you have $5,000 to invest for retirement. You plan to put about $1,000 in five different investments. You don't want more than 20% of your assets dedicated to any single security. You plan to buy Google (GOOG, news), Janus Twenty T (JAVLX), Legg Mason Capital Management Value Trust (LMVTX), Time Warner (TWX, news) and General Electric (GE, news).
Here's what you need to do to X-ray this possible portfolio for overlap on Morningstar.com:
- Sign up for Morningstar.com's Premium Membership.
- Click on Morningstar.com's Portfolio Manager.
- Click on Create New Portfolio.
- Name Your Portfolio.
- Choose either a Watch List or a Transaction Portfolio. A Transaction Portfolio is far more precise than a Watch List Portfolio, and is the better choice overall, because it allows you to more effectively monitor your actual purchases over time. For this exercise, though, build a simpler Watch List Portfolio instead.
- For each of your funds and stocks, enter the ticker and the amount of money you plan to invest or number of shares you plan to buy.
- Click the Save Portfolio button at the bottom of the page.
Now it's time to X-ray. Click on the X-Ray tab and then click the Stock Intersection button. (The other buttons, X-Ray Details and X-Ray Interpreter, are different ways to examine how your portfolio fits together.)
The program examines each fund's top 50 holdings (a fund's 51st and succeeding holdings aren't likely to be significant stakes) and weights them according to how much you have invested in each fund.
So what did you find? Higher weightings in certain stocks than you said you wanted?
Remember, you wanted to limit your exposure to any one investment to 20% of your assets. Yet the X-Ray Report may inform you that you'd have more than 20% of your assets in some of your stocks because they could be dominant holdings in your two mutual fund choices, depending on how those funds are currently invested.
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