Are you a mutual fund investor, or just a clutter collector? Many investors think that holding more mutual funds creates diversification—in theory buffering their portfolios from downturns in the market. In fact holding too many funds can make it much harder to keep you portfolio well diversified and adding too many funds also dramatically increases your investment costs without protecting your money against market downturns.

1. Holding too many funds makes it hard to track what you actually own. Just as its hard to find the right shirt in a cluttered, disorganized closet, its hard to know what you own and why in a messy, overstuffed portfolio. Be honest. When was the last time you read the semiannual reports on your mutual funds? You can and should check these reports regularly. Its easier than you think if you own five funds, but not if you own 35.

2. Adding funds adds cost but not diversification. Outside of employer-based retirement accounts, you will usually be charged a fee (in the form of a commission and/or a load) in order to buy or sell a fund. Those fees can add up very fast and it can take years before you earn back the cost of those transaction fees. For more on the true sources of diversification, click here .

3. Many investment subcategories are not true sources of diversification. Mutual fund companies love to start new funds. Often times these new funds are little more than marketing gimmicks designed to test concepts and generate extra commissions for agents. Fancy mutual fund names can make it sound as if the mutual fund manager is doing something special, but most funds have a surprising degree of overlap in their top holdings. For example funds will use terms such as value or growth in their names, yet the criteria that define a value or growth stock are slippery and the two types of funds are often more alike than different.

4. Style drift makes too many funds clones of each other. Just going by the name of the fund is a poor way to figure out what the fund actually invests in. For example, many large company funds that theoretically focus on US-based corporations have in recent years added substantially to their international holdings, chasing a run of outperformance by overseas companies. You might think that a fund called, for example, American Funds Investment Company of America would include only US-based companies, and you might have bought the fund for that reason, but an October 2009 check showed that this fund held over 13 percent of its assets in foreign-based companies. If you dont know this sort of key fact for all of your funds you might wind up with too much exposure to international stocks. The same thing happens with every other hot category, from small company stocks to emerging market debt—your manager might be slipping strange stuff into your portfolio unless you devote lots of time to keep an eye on things.

5. Staying with a single fund management family, such as Fidelity or American Funds can make the situation worse. Fund managers at the same company often have offices next door to each other, go to the same conferences, listen to the same in-house analysts and generally share a similar investment outlook. Not surprisingly, they find themselves owning many of the same stocks in common in the funds that they manage.

Is your portfolio cluttered with too many funds? Are you having trouble tracking what you own? We can help you analyze and streamline your portfolio without spending a fortune in fees. To schedule an investment review, click here .

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past results are not indicative of future performance. Outside sources used in this article are believed but not guaranteed to be accurate. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.