The 7 Deadly Sins of 401k Investing

Best & Worst Vanguard Funds for Retirement

401k Investing Sin #7 – Gluttony

Though diversification is important, you don’t have to own every fund your 401k administrator offers to spread out your risk. Mutual funds are already a basket of many stocks or bonds, so there’s no need to go overboard. Six or seven funds should be plenty.

It’s also worth noting that an unwieldy 401k is not only harder to keep track of and manage but also will likely limit your returns because each fund is going to take its cut in the form of fees.

It’s also worth noting that even if you limit yourself to a handful of mutual funds, your 401k can be the victim of gluttony in the form of multi-management. Too many cooks can still be in the kitchen.

Take the Vanguard Windsor II Fund (VWNFX). In January, Vanguard announced that it was handing an 8.5% piece of Windsor II to Sanders Capital and, in particular, John Mahedy, who had worked on the original Vanguard Windsor Investor Fund (VWNDX) when he was at AllianceBernstein. Unfortunately, rather than give Mahedy and his team a mandate to run a value fund, Vanguard is simply continuing to add chefs to the Windsor II kitchen.  So far, more managers haven’t improved results.

Vanguard, like many mutual fund companies, claims that multi-managers add to diversification. But a good portfolio shouldn’t have to rely on multi-management to achieve that — because what Vanguard can’t point to is improved performance from its multi-managed funds.

Low risk doesn’t have to mean low returns. If you’re a glutton for funds or a glutton for managers, you may be diversifying your portfolio right out of the profits you deserve.