Confessions of a mutual-fund junkie

By Tracy Harger

At the age of 18, I was working at a fast-food joint in Colorado and establishing residency for college. It was the mid-1980s, and my savings account was earning a heady 7%. But that wasn't enough, since I knew the bank was loaning out my money at twice that.

So I talked to my father and a cousin about investing. Both of them were strong on mutual funds and steered me, in that pre-Internet era, to research material available at the library. I chose three different mutual funds and invested a total of $1,000. I also set up automatic investment plans at two to put my $3.35-an-hour paycheck to work.

I have done many things right in the 20 years since then.

I have saved almost compulsively on paychecks that would make most people cringe. That's enabled me to take some dream vacations -- a summer in Europe, three and a half months in the South Pacific -- change careers twice, tour America's Major League ballparks at my leisure and buy a house I love. I have jumped on new opportunities such as the 401(k) and the Roth IRA. I do not have any debts.

But I have owned 84 different mutual funds.

Hello. My name is Tracy, and I'm a mutual-fund junkie.

Chasing the hot hand

One of my first moves as a newbie investor was to subscribe to Changing Times magazine (now Kiplinger Personal Finance). It offered a surfeit of data and periodically reviewed and ranked funds. I felt compelled to open accounts in many of the "hot" performers. If the funds did well, I kept them; if they performed badly, I dumped them and replaced them with another hot fund or two. My only constant was a willingness to jump into anything that smelled like money.

Ah, Janus in the 1990s. You remember, don't you? A chart of its returns looked like the Matterhorn. Every time Janus threatened to close a fund to new investors, I would throw a little money into it, lest I be shut out of the next "hot" fund. By 1999, I owned nine different Janus funds.

I owned six different funds through what's now AIM Funds. Who wouldn't want to own a 'Leisure' fund?

Often I held on for less than a year before I leapt at the next shiny object. Sometimes my take was just a few hundred dollars in each.

I even directed my career toward the investment world -- obtaining a license to sell mutual funds and then working at a company that acted as a record-keeper for several mutual fund groups. Of course, I was exposed to even more investment opportunities, some of which I succumbed to.

I followed Kiplinger's advice scrupulously. I set financial goals (retirement ASAP). I set up automatic monthly investments. I put 20% in international funds. I ignored daily market fluctuations.

And while Kiplinger's did recommend diversification, it certainly would not have condoned the extremism I had begun to practice. I made excuses: I'm a more sophisticated investor than most people, and after all, there are worse things than being a compulsive investor, right?

How and why I saw the light

Having survived and eventually thrived after the 1987 market crash, I didn't blink during the tech and post-Sept. 11 downturn, in which I lost approximately 35% of my assets. In fact, I used it as a buying opportunity. What bothered me was the particular beating I took because so many of my Janus accounts held the same stocks. But it wasn't the straw that broke the camel's back.

After all, my returns were quite respectable over the long haul, and inertia is a powerful thing. Even though the portfolio had grown incredibly cumbersome, it was working for me. Why change?

It took the mutual-fund trading scandal of 2002-03 to wake me up. It's one thing to lose money because I had overloaded my portfolio with tech funds. It's quite another to be hurt by "improper trading" -- a polite term for betraying the clients who trusted you.

If you ever needed proof that your money isn't as important to anyone as it is to you, there it was.

What's worse, the people who ran these suspect mutual funds cynically counted on the very fear and inertia that bring investors to their door when they decided to treat some customers better than others.

So I sold the dogs and reinvested the proceeds. And this time, I paid attention to what type of fund I was buying, not just its track record.

Back to the drawing board

The first step was taking stock of what I owned. Thanks to an elaborate Excel spreadsheet, devised over a decade ago (before all the great tools now available on the Internet), I had a timeline of my investments since 1985. In 2003, my holdings included 29 different mutual funds in both taxable and nontaxable accounts. I used Internet tools -- MSN Money has a good one, and your brokerage or 401(k) company probably has something similar -- to figure out what style my funds were (growth, value or blended) and what size companies they invested in (small-, mid- or large-cap). Obviously, you don't want to own funds that own largely the same investments.

In a stroke of good luck, just as I resolved to tame the beast, Kiplinger's asked readers to contact its "Portfolio Doctor" for free investment advice. Obviously, everyone can't be selected as the poster child of investing gone amok and will not get free advice from financial planners, so here is some of what I've learned.

Some advisers contend that one mutual fund can be sufficient, if it's the right one. In fact, the appeal of many so-called life-cycle funds is their prepackaged mix of investments that changes as you age. But as a junkie trying to come clean, not to go cold turkey, I knew that approach would not work for me. A much more liberal interpretation of diversification would limit you to perhaps five or six funds. According to the experts, a possible breakdown for a relatively aggressive investor with a timeline of 15 to 20 years (me) would be:

• 15% small-cap stocks, value-oriented

• 15% small-cap stocks, growth-oriented (or 30% in a small-cap stock fund that blends the two styles)

• 20% mid/large-cap stock, value oriented

• 20% mid/large-cap stock, growth oriented (or 40% in a mid/large cap stock fund that blends the two styles)

• 20% international stocks -- perhaps split between developed and emerging economies

• 10% bond fund (the quality and type to be determined by your investment timeline and your tolerance for risk)

Once I decided on the new funds I wanted to own and the portfolio mix that was right for me, I had to sell or transfer most of what I held. I did exercise some independence in following Kiplinger's advice. I ignored the small-company fund selections in favor of two funds that I already held (one of which returned 76% during the down market). And I admit that I still hold more than their recommendation of six funds.

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