Streamlining is often at the top of my list when I work on Portfolio Makeovers each year. Most investors end up with needlessly complex portfolios, so one of my main goals for when I embark on a makeover is to skinny down an unwieldy list of holdings to a group of names that provides a lot of diversification but is simpler to oversee.
First on the chopping block? Sector- and region-specific funds. If an investor already has high-quality, well-diversified domestic- and international-stock holdings, these more specialized funds often duplicate exposures that are in the portfolio already. Layering them on top of a diversified list of holdings can add additional risk by supersizing exposures to individual regions and sectors, and often increases the portfolios' overall expenses, too. Because they're typically smaller than diversified domestic- and foreign-stock funds, sector- and region-specific funds usually have higher costs. Finally, investors' track records of using specialized funds well is poor. Because of their higher volatility, investors in aggregate have demonstrated a pattern of buying high and selling low.
Yet even as sector and regional funds are the easy targets when it comes to duplicative holdings, other positions might not be as obviously redundant, even for savvy investors who are plugged into the overlap issue. You may have good reason to want increased exposure to certain areas, beyond what you're already getting with your diversified equity funds, either because you'd like to make a short-term tactical play or because you'd like to emphasize a given area of the market long term. But if you already have a well-diversified portfolio and are considering adding to a niche category, pause to ask yourself whether your current exposure is adequate.