George is a 70-something investor from West Palm Beach, Fla., who has been made a bit crazy by the stock market recently. Still, in reading my...

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George is a 70-something investor from West Palm Beach, Fla., who has been made a bit crazy by the stock market recently.

Still, in reading my column last week — which discussed how the market is giving investors a chance to upgrade their portfolio — he wanted to know whether an investor could improve a portfolio simply by adding “more and better funds.”

“Do I have to sell what I have, or can I just add more to the mix,” George wrote me. “In this kind of market, I would think more funds give me more protection from the market. … If that’s not right, then what’s the correct number of funds for an investor to own?”

It’s an outstanding question at a time when investors are looking to strike the right balance between safety and aggression, wanting to capture the best returns they can get without taking on too much risk. But it also highlights some common misconceptions about funds.

With actively managed mutual funds, more is not necessarily better. Studies show that owning four funds in the same asset category is virtually certain to create a “closet index fund,” which means the combined performance of the funds winds up doing no better than the index for that asset class; worse yet, that index-or-worse overall performance comes at a much higher cost than simply owning a mutual fund or exchange-traded fund tracking the index.

“It’s a good time to check up and see if your fund is performing worse than you would have expected in a tumultuous environment,” said Christine Benz, director of personal finance at Morningstar. “If performance is worse than you expected, then maybe the fund is a bad match for your risk tolerance.”

But citing the closet index fund issue, Benz noted that she would prefer to replace the fund, rather than simply add another one to the mix. She thinks two funds in an asset class is sufficient.

“Fewer [funds] is better,” she said. “The fewer moving parts you have with your portfolio, the better off you will be.”

George’s basic premise that more funds might provide market protection is not entirely incorrect. The key issue is what each fund does, and how it plays with others.

Investors should not look just at what their funds own based on their name or general asset classification but should dig in to see the most recent snapshot of where the money is actually invested. Ultimately, an investor can build a terrific portfolio with no more than six funds covering domestic and foreign markets, large, and small stocks, bonds and money-markets.

Sector funds and other issues can be used to flesh out the holdings and tilt the assets to areas the investor prefers, without creating massive overlap with the core holdings.

Making a portfolio a little more complicated than that is fine, but going much beyond it — with closer to 20 funds than a half dozen, and with too many decisions to make — is almost sure to leave you with an unmanaged mess over time.

Chuck Jaffe is senior columnist at MarketWatch. He can be reached at or Box 70, Cohasset, MA 02025-0070.