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By Jason Stipp | 08-01-2011 06:00 AM

Hands-On Investors: Don't Make These Mistakes

Even more seasoned investors can inadvertently water down their carefully planned portfolios, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar. We know a lot of you out there are enthusiast investors, hands-on power users of Morningstar.com, but at the end of the day, all of us are just human and prone to make some mistakes. Joining me, today, to offer some tips on avoiding mistakes that sophisticated investors might be making is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, I want to start at the portfolio level. Our Portfolio X-Ray and Portfolio Manager offers a lot of detail about investors' portfolios. We know a lot of our power users check this X-Ray report out and sort of see how they are allocated. It's good to be hands-on and to know where you are, but there are also some potential pitfalls that you can fall into.

Benz: I think, there are, Jason. One of the big ones is looking at how your portfolio is arrayed across the Morningstar Style Box and thinking that you need to have equal distribution in the style box squares. One thing that even sophisticated investors might fall into is assuming that they need to have an equal distribution between value, blend, and growth.

Investors might naturally end up with some biases, and those are OK as long as you buy into them and you know what they are. So, I know we have a lot of avid value investors on the site. Certainly a lot of our stock analysts are value investors at heart, and that's OK. If that's your strategy and that's your style, there is no need to artificially force your way into some growth exposure that you don't really believe in. But if you do have a portfolio that's really listing toward one side of the style box or the other or into small caps just understand that you will have periods of time when your portfolio will underperform other parts of the market or maybe even the market at large. It's OK to have those biases, but just know what they are.

Stipp: So, make sure you know your tilts, but also make sure you know why or why you're not comfortable with those?

Benz: Right, and the same goes for sector exposure. So, there is no need to jam all of your sector exposure to that it's exactly equivalent to what, say, a broad market index fund is. It's OK to have those sector bets, but just be aware of what they are.

Stipp: So, Christine, I know, a lot of our power users are looking through our Analysts Reports, and they're trying to pick some of the best actively managed funds. We know that active management sometimes will underperform indexes, but the best managers can perform well, over even longer periods of time. It's also hard to put all of those active managers together into a good portfolio, right?

Benz: It is. One thing that's a lot of people fall into is, they have chosen many strong-performing funds, many funds with great fundamentals, but they've simply amassed too many of them. The net result is that you're kind of drowning out some of the very strong performers. You're ending up with a portfolio that is perhaps overdiversified. You're watering down individual emphases that might appear in some of those portfolios. You're ending up with a portfolio that's very indexlike in terms of its portfolio, but you may be paying active management fees for it. So, that's a pitfall that even very good investors can fall into from time to time.

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