I am always trying to come up with new combinations of investments for the next exciting portfolio. Lately, I've been sort of stuck. The norm would be to build something like a QQQ portfolio, a Russell 1000, or a Russell 2000 portfolio, maybe even a Mid-Cap or Small-Cap portfolio. Boring stuff if you think about it. 
I could get a little radical and try to build a pop culture type theme portfolio like the Sopranos portfolio, the Donald Trump portfolio- "your fired", or the Obama vs. Dick Cheney portfolio- a long/ short portfolio of course, with lots of defense stocks on the Cheney side of the portfolio. How about a Weapons of Mass Destruction portfolio- that would be a derivatives based portfolio with lots of CMOs'- sub-prime mortgages in the mix. Heh-heh-heh!
We could really get creative and produce some wonderful stuff, but I don't know if they would make any money. Or maybe, I could build a portfolio such as a moderate Mid-Cap portfolio and just give it one of those crazy names; Nah! That would be cheating, sort of like selling a six for a nine. This site is about education, so I will stick to what works. Building a successful portfolio is all about diversification and risk; a well diversified portfolio spreads out your investments and reduces the risks in your portfolio. Diversification minimizes the risks from any one investment affecting the entire returns of the whole portfolio. There is a good definition of diversification that I found on Investopedia.com and another more detailed definition of the benefits of diversification found on Wikipedia.org.
However, after reviewing a few 401K statements over the last few months, I've noticed that many people interpret diversification differently, have no idea what being diversified means, and basically invest their money in similar like funds because the names of the funds or family of funds are different. For example, based on the similarities and the differences between these two funds, would you purchase the Nuveen Tradewinds Value Opportunities Fund (NYSE: NVOCX) and the Fidelity Advisor New Insights Fund (NYSE: FNICX) for your portfolio.
They are both class C shares, back-end loaded funds- which means that you are charged a fee when you sell the fund. The Nuveen Fund is a Mid-Cap Blend Fund and the Fidelity Advisor is a Large Growth Fund. There is a one year difference in the fund's inception dates with Nuveen Fund opening in 2004 and the Fidelity Advisor Fund in 2003. Both funds have respectable Morningstar growth ratings of Five stars- High and 4 stars- Above Average growth respectively.
However, choosing to invest in both funds may weaken your diversification strategy, because both of the funds invests heavily in the same sectors, and in this case it's the Business, Service and Consumer Services sectors; the only major differences being is that one fund invests in growth companies with market capitalization's of $2 to $10 billion, and can also invest in large- caps if needed, while the other invest in companies in the same sectors, with market capitalization of $10 billion or more.
However, choosing to invest in both funds may weaken your diversification strategy, because both of the funds invests heavily in the same sectors, and in this case it's the Business, Service and Consumer Services sectors; the only major differences being is that one fund invests in growth companies with market capitalization's of $2 to $10 billion, and can also invest in large- caps if needed, while the other invest in companies in the same sectors, with market capitalization of $10 billion or more.
Substantial differences in either funds only seems to exist as a mere convenience which can be readily observed in the percentages of the Energy, Financial Services and Basic materials sector positions. The point that I am trying to make is that there is relatively not much differences in both of these funds, especially over the long term. The Nuveen fund can invest in large-caps at will, to smooth out the risks of mid-cap investing and the Fidelity Advisor fund can reduce its holdings in some of the large cap positions by possibly investing in mid-cap companies that may be considered value opportunities to boost growth in the fund.
Although extremely important, buying a fund just based on sales charges, total returns, fund description, fund management fees, and ratings are good ideas and practice, these factors may not be the only decision you need to make, if you're looking to diversify and reduce investment risks. Examining the funds Sector Breakdown and positions may give you a better idea as far as diversification is concerned; duplication oft-times disrupt a good, well-intentioned diversification strategy. In short, as you re-adjust your positions for next year, reviewing how you implement a diversification strategy could be the turning point between enjoying stable profits or huge losses in your portfolio. To view a video cast or listen to a podcast of this blog go to Facebook at http://www.facebook.com/rickmwalter or http://ucsinv1.podomatic.com/ . You can also download the fund comparisons report at IAPEQ.com.
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