Red Flags for Overlap

The following characteristics increase the risk that a fund's holdings will be redundant with those of other funds in your portfolio:

Concentrated portfolios.The investment strategy of some funds involves focusing assets in relatively few holdings. Such concentrations increase the risk of overlap. Keep an especially close eye on funds that invest more than 5% in the stock of any one particular company.

A focus on particular sectors or regions. Funds that focus on a segment of the market could lead to significant overweightings when combined with your other holdings. Compare a fund's sector allocations or geographic composition with those of broad benchmarks, such as the S&P 500 (for U.S. stocks) or the MSCI EAFE (for international shares). Watch funds carefully for overlap if their sector or regional positions exceed their allocation in their respective indices by more than 10 percentage points.