Everyone who has looked into how to invest their money has heard the term "diversify", especially if you have wondered into a local bank to discuss their unit trust selections. The beauty of the unit trust (or mutual fund) concept was that small individual investors could pool their modest savings together to gain more diversification in their portfolio, efficiency of scale in their purchasing of investments, and a dose of professional management.  Unfortunately, as is often the sad case, greed came between the beautiful concept and reality.

Today, the world is filled with more mutual funds and unit trusts (and various other names for pooled investor money) than there are listed companies to invest in! Astonishing, I know, but true. There must be a reason for the dramatic success of this fund industry. The reason is simple…easy profits for fund management companies. Straying from their initial (let's give them the benefit of doubt) noble goals of helping the small individuals pool their funds in hope of diversification, efficiency and professional management, they soon focused on profits. Ask yourself, would a financial partner out for my best interests put 5% or more of my hard earned savings into his pocket PRIOR to making a single investment, and then invest what is left in such a way that guarantees me to never consistently beat the market index? Don't answer yet, let us first examine more thoroughly the three concepts of funds.

Efficiency of Scale is certainly gained by pooled investor funds. In most parts of the world an investor will pay a proportionally smaller fee with increasing stock purchases.  Professional Management must be one advantage we can count on from the fund industry, right? Well, as it turns out, in the USA where there are many decades of historical data on fund performance, a full 90% of professional fund managers underperform the S&P 500 index (a collection of 500 major companies which represent all market sectors). Hard to believe, 9 of 10 of these well-dressed Mercedes-driving, MBA-toting, silver-tongued devils can't even consistently match a computer generated market average. (We won't even mention the Wall Street Journal features where monkeys throwing darts to choose stocks beat them over 50% of the time too!)

Diversification has got to be the one benefit of a fund that no one can refute, right? True, a fund achieves diversification, but to such an excessive degree it moves from a benefit to a detriment. While study after study (and many super-investor documented success stories) have indicated that no more than ten, that's right, just 10 stocks are necessary to provide an investor with sufficient diversification. Furthermore, many studies have validated that a portfolio with more than 30 stocks suffers from "over diversification".

Having more than 30 stocks in a portfolio will dilute the positive affect of stellar performance of any one component company of your portfolio. The average unit trust will typically hold a portfolio of 100 to 200 individual stocks or more. Now, a fund manager will quickly point out that the risk of a poor performer in the portfolio will be diluted also.  However, the facts are the facts, and the studies clearly indicate better performance with a portfolio of under 30 stocks. This may be due to the tendency of stocks to rise over time, not fall; thus, the risk of diluting the effect of a big winner in a portfolio is greater than the risk           reduction by diluting the effect of a loser. The more famous investors in history have demonstrated their ability to pick stocks by knowing their fundamentals inside and out, and holding only five to ten major investments at any given time as to allow them to focus keenly on their performance and potential.

In the final analysis, one has to wonder why so many people turn to the professionally managed unit trust industry? Each advantage of the initial noble concept has now disappeared, but still people flock to the idea. Two reasons. First, the professional fund management business makes every effort to make financial money management and stock investing look as complicated as possible to discourage individuals from taking a "do-it-yourself" approach. Second, they use part of the fees they extract from your unit trust to advertise like crazy.  Ironic, your own money (which reduced your retirement savings significantly) is used to convince you to invest more. Does Coke really taste better than Pepsi? Is a Mercedes really more dependable than a Toyota? Does Starbucks coffee really taste better? Advertising works!

There is an alternative. Do it yourself. No one will ever have a more vested interest in your personal financial success than YOU. A portfolio of five to ten growth companies will likely reward you with long-term profits well above even the most savvy fund manager,  and you pay none of the fees. There are ample internet sites today to help the savvy self-sufficient investor. Do a little surfing, use your common sense, and take control and responsibility of your own financial future. It can even be fun!

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