Put your portfolio on cruise control

Neglecting your investments because you're too busy to comb through annual reports, track your holdings, and dump lagging stocks or funds? Here's good news: You may actually improve returns by putting part or all of your portfolio on cruise control. Just follow these tips.

Cut out overlapping funds. "If you own too many funds or have added funds randomly, some probably have similar objectives," says Dale Vetter, a financial planner in Willingboro, NJ. "You may even be invested in the same companies through different funds." To reduce the chance of duplication-as well as the monitoring you'll have to do-try to invest in no more than eight mutual funds which are spread among various types of assets, Vetter suggests. Use one of the Internet tools to avoid stock overlap in your fund portfolio. One of the best is Instant X-Ray at http://www.morningstar.com.

Keep a small- and large-company growth fund and a small- and large-company value fund. You'll get a mix of risky and conservative holdings that don't track one another. It's also important to own large- and small-company international funds as a hedge against dives in US markets.

If you've got two or more similar funds in any category, compare their returns, expense ratios, and turnover rates. In general, the higher the turnover of profitable stocks, the greater your yearly tax liability. Ax those in each category with the lowest returns and highest expenses.

One caveat you should keep in mind: Make sure you've owned a fund for more than 12 months before selling. Otherwise, you may owe ordinary income tax on your profit instead of the much more appealing 15 percent rate (5 percent for taxpayers in the 15 percent or lower tax brackets) that now applies to long-term gains.

Stay away from individual stocks. "You'd need about 25 stocks to diversify your assets enough to reduce market risk," says Vetter. "Monitoring those holdings takes time. If you don't stay up to date on a company's products, market, and finances, by the time you learn that a stock decline is due to a major change in operations, it's too late to avoid a loss."

With mutual funds, the portfolio manager researches the companies, makes the decisions, and executes the trades for you. That's especially helpful with foreign holdings. It's easier to buy shares through an international mutual fund than to choose overseas companies yourself and sort out the tax, currency, and political issues.

Granted, the asset values of fund shares are reduced by annual operating expenses and management fees-1.4 percent is the average expense ratio. But such fees are usually a small price to pay for instant diversification and portfolio management.

Consider investing in a fund of funds. Funds of funds are just what the name suggests-funds that invest in other funds.

The Scudder Pathway Series, for example, offers conservative, moderate, and growth funds of funds. Each contains an appropriate selection of Scudder domestic, international, value, bond, growth, and money-market funds. Other companies offering funds of funds include The Vanguard Group (LifeStrategy Funds), Fidelity Investments (Freedom Funds), and Charles Schwab & Co. (Charles Schwab MarketTrack Portfolios).