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Fund Spy

Diversify, but Not Too Much

Why adding more asset classes isn't always helpful.

If you're a do-it-yourself investor building a portfolio, the investment options can be overwhelming. Morningstar now divides the fund universe into about 140 separate categories based on each fund's underlying holdings. But while each Morningstar Category is a little different, there's no need to add all of them--or even more than a handful--to your portfolio.

I'll explain some of the theory behind portfolio diversification by asset class and show how it can affect your portfolio. I'll also look at risk and return profiles for a model portfolio combining stocks, bonds, and a diversified asset in different weightings.