How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?

Can investors receive diversification benefits from holding more than a single mutual fund in their portfolios? Simulation analysis shows that the time-series diversification benefits are minimal but that the expected dispersion in terminal-period wealth can be substantially reduced by holding multiple funds. Portfolios with as few as four growth funds halve the dispersion in terminal-period wealth for 5- to 19-year holding periods. In addition, downside risk measures decline as funds are added to portfolios. These advantages to multiple-fund portfolios are especially meaningful for investors funding fixed-horizon investment goals such as retirement or college savings.