The following is taken fron an article in the July 2014 issue of Morningstar ETFInvestor.  Samuel Lee was the author of the article.

“Most investors understand that they should diversify a lot.  However, some hurt themselves by behaving inconsistently.  They diversify a lot while implicitly behaving as if they know a lot.  A big subset of this group is investors who own lots of different expensive funds.  Owning one expensive fund is a high-confidence bet on the manager.  Well-done studies estimate that the percentage of truly skilled mutual fund managers is in the low single digits.

It would be strange if your process for assessing mangers turns up lots and lots of skilled ones, because there aren’t many in the first place.  (If you see skilled mangers everywhere, chances are your process is broken or not discriminating enough.)  It  would be even stranger if you bet on many of them.  Doing so dooms you to getting index-like results while paying hefty fees.  It makes little sense to pay 1% or more of assets on an aggregate portfolio with hundreds of positions and marketlike behavior.

An exception is if you assemble a portfolio of extremely concentrated fund mangers.  Owning 10 funds with 10 stocks each put together will look like a moderately concentrated fund manager.  This is a model some successful endowments, hedge funds, and mutual funds use.

Most investors should own diversified, low-cost funds.  Those who believe they know something should concentrate to the extent that they’re confident in their own abilities.  A big dang is that humans are overconfident; many will concentrate when they should be diversified.”

Pay special attention to the above if you think it does not apply to you!