How many stocks should I hold in my portfolio ?

1st Aug '18 by tony akram

16 comments 4611 reads

Hi Everyone ,

I need some help and advice from more experienced investors .

My dilemma is I do not know how many stocks to hold (I currently have 30 ) I personally feel this is too much as very difficult to keep track off and to know each company inside out .

I have a feeling I should have no more than 15-20 good companies and only sell a holding to buy something better and thus this discipline will force me to be careful in my selected holdings , well at least that's the theory !! .

I understand the more concentrated the more risk and I am willing to accept this .

I know of some people who have 70 or 80 holdings (so they can sleep at night ) but surely you would be better putting this in a tracker fund ?

At the end of the day its what works for you in the end and I am in no position to judge but would welcome thoughts from fellow investors .

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Tony Akram

Premium Member

16 comments

Trigger14

2nd Aug '18

Hi Tony

I noticed you hadn’t got replies yet so I thought I might kick things off. I think it’s a bit of a difficult question and depends on your preferences and the rest of your strategy, but I can give you some thoughts:

The main benefit from diversification is to protect yourself from idiosyncratic risk I.e. the risk that a particular business does less well than expected. It does not protect you from market risk. The benefits of this diminish quite quickly after 15 shares or so, so there isn’t really a very strong justification for holding more than this solely on diversification grounds.

If you are a ‘buy and hold’ investor with some conviction in your stockpicking it might make sense to be quite concentrated and hold only your best ideas that you know inside out. If you are doing something more systematic like investing with Stockranks, or trading momentum you might prefer to hold more shares (at least it would probably not hurt your returns much to do so).

My experience is that more concentration leads to better results, but only if you can control the psychological / emotional mistakes being too concentrated can cause. I am more prone to panic / cut winners if the positions are too large. The impact of overtrading is also proportionally greater if I hold fewer positions.

As someone with a more systematic approach who is prone to overtrading, I’m currently slowly moving from 15 to 25 holdings but will remain quite concentrated in my high conviction picks. Bottom line is I don’t think there is fundamentally a great difference between having 15 or 30, but what works for you depends on your approach and what kinds of mistakes you are prone to.

tony akram

2nd Aug '18

Hi Trigger 14

Thank you for your feed back you comments definitely make sense -thanks

andrea34

2nd Aug '18

I think one needs at least 20-25 stocks in a portfolio in order to provide diversification across industries, different risk levels, and also provide some dividend income too. If it was the case that you were happy with the quality and performance of all of your 30 stocks then why would sell any of them? Why do you find it difficult to keep track of them?

I don't think one could expect to know any company 'inside out' based on the information that is available via RNS to investors.

I don't accept the Tracker argument, Trackers by their very nature track particular indexes, so although they provide diversification in terms of industry they wouldn't provide so much diversification in any other respect. And in any index, there will always be poorly performing companies that will provide some drag of the index. Trackers also rarely outperform an index as well.

pgs501

2nd Aug '18

Hi Trigger,

I like all that you have said about risk and the control of emotional mistakes enabling one to run a more concentrated portfolio however I would also add one more thing.

Assuming you pick stocks after a fair amount of research then for me a key aspect is simply how much time I am able to honestly put in to the researching of stocks. As I have a full time job I find that if I get much above 15 companies in my portfolio I honestly do not know all I should know about all the companies I hold and am not able to both monitor my current holdings and research new ideas properly. over time I found that I either was not responsive enough to a negative change in a current holding leading to a larger loss than I should have, or I purchased a new share with only a cursory level of research only to rapidly sell it as an issue became apparent to me.

Every investor is different in terms of how effective their monitoring tools are and if you are more efficient than me you may be able to push it to 20-25 whilst holding down a full time job without it leading to sub-standard research and monitoring.

I suppose the whole point of Stockopedia really is to massively reduce the required time for investing successfully by cutting the total equity market down to the much smaller number of companies that meet academically tested criteria (be they relative or absolute), whilst also focussing us on the drivers that actually create outperformance. For example I met a guy last week at the Stockslam who invests in 50 companies with one major criteria; extremely high QM score and that would produce returns he was very happy with. A kind of ETF but a far better ETF than he would find elsewhere.

What I am taking a long time to say is that it is all dependant on you. If you are finding that holding 30 stocks is honestly reducing the quality of knowledge you have on the majority of your companies, drop it to 25 and see how that feels, then drop it further until you feel comfortable with all your holdings.

Carcosa

2nd Aug '18

I've been investing in the share market since late 1990's and full time (only source if income since 2006) so I believe I can offer some practical advice.

The number of shares you hold in your portfolio depends on a number of factors. If you want the maximum possible returns then the answer is one share only. Of course this comes with a great deal of risk in that if you get it wrong you can lose your entire holding, so perhaps that is to be avoided!

The question comes down to how much of your wealth are you willing to risk and how good are you at selecting shares to invest in. Now when I was much younger and had a job and just starting out I could afford to lose a lot on my investment. So for a number of years I did 'bet the farm' and have everything in no more than three shares. If you don't go mad with your selections you are highly unlikely to lose the lot but certainly at risk of losing a substantial percentage. However if you are sufficiently strong willed then those shares may well come back and be good winners but only in a longer time frame than you may have originally considered. This is where you start to really learn about investor (your) psychology and things like confirmation bias and running with the crowd; Subjects which will hold you in very good stead later in your investment career. My 'test' is that if you can still sleep at night having lost 40% on a share and still convinced you are 'right' when everyone else is saying 'sell' then you have achieved the level of being a good long term investor.

There will become a time however where you have built up sufficient investment wealth that the risk of losing a substantial amount of it will affect your daily lifestyle. That is the time when you may wish to change your strategy, say into a HYP, or start increasing the number of shares you own. But diversification is just not about owning more companies but its about owning companies in different types of businesses.

Although I am a 'full time' investor I personally find that once I am above 15 shares then keeping on top of them becomes problematical. So I tend to stay within the 10-15 range at any one time. But of course I actually enjoy doing research, creating spreadsheets etc. If you want to have a portfolio that needs less tending then you probably need to consider the size of the companies and perhaps move into large cap companies as they tend to be 'safer'. As you have indicated though, the real results tend to follow the major indexes.

I have tried holding and managing a 25 share portfolio and I found it too onerous plus when I had a share which gained appreciably it has a small effect on the overall portfolio; opponents would point out that a share which plummeted in such a portfolio would also have little effect. However stock picking skills should give you more winners than losers and if that is not working out for you then the market is really telling you that you suck at this game and better off with a mechanical portfolio (eg HYP) or a tracker (which I think is overrated anyway).

So, to recap. Portfolio size is dependent on your investing skill (which really takes a few years to figure out), how much you are willing to risk, your psychology toward investing and where you are in life. Personally my journey was essentially 1-3 shares only for the first three years and then a 15 share HYP (could not afford the time to do research) and subsequently 10-15 shares for the last ten years or so.

In retrospect having those 1-3 shares really did set me up in life as they were very successful over a hold period of 18-36 months for each of them.

gus 1065

2nd Aug '18

Hi Tony.

A topic that’s often discussed on Stocko and there’s a range of opinions.

Worth observing that the size of your overall fund to invest, your time of life, investment time horizon, investing objectives, size of your portfolio vis a vis other sources of income, risk appetite etc., are some of the many factors that determine what approach will best suit each individual. From a practical point of view, there’s probably a minimum size per individual holding below which trading costs etc., will make it impractical to build up a large number of positions but otherwise you’re free to choose somewhere along the spectrum from “one” to “all”.

I’m at quite a late stage in the cycle being retired with a reasonable capital pot (including a SIPP) with no immediate need or intention to liquidate holdings for other purposes and while not having a salaried income am reasonably risk tolerant. I suspect I’m at the extreme end of the “diversification is the only free lunch in investing” school of thought and currently hold about 160 individual stocks as well as a range of funds and ETF’s. I used to limit myself to about 20 shares which was as many as I could comfortably monitor but tools such as Stocko and various online news services such as Investegate make it much easier to keep track of things. Although this might seem a large number of positions, the 80:20 (or more like 95:5) rule applies and I spend most of my time focussing on the small number of shares that are either reporting or showing unusual share price movement at a particular point in time. Like an arable farmer, most of the time the crops are left alone to do their own thing without me worrying over them. (Not sure I could cope with livestock that need individual attention every day).

I tend to spend a fair bit of time selecting individual shares but once purchased tend to hold long term, occasionally scaling up or down position sizes but only selling outright perhaps 5-10 shares a year. Within the wider portfolio I have built up mini portfolios to achieve different objectives (e.g. blue chip FTSE 100/250 dividend payers, a NAPs portfolio, a Value/takeover target group, a higher risk O&G and mining play etc.) but in all of these there’s a deliberate attempt to limit individual holdings (especially for companies I’ve not held before) to not more than 1% of the total. There are a few exceptions, for example a couple of big winners such as Burford Capital (LON:BUR) and Sirius Minerals (LON:SXX) , but that’s probably a legacy bias to running winners that prudence would suggest pruning. There are also a couple of dogs that with hindsight I originally put too much capital into that have done badly, e.g. Pantheon Resources (LON:PANR) that I’ve held onto more in hope than expectation of better things to come. They’re also a reminder of the value of not letting single positions get too big.

This portfolio of portfolios approach suits my style of investing. I like to develop and follow investing themes but accept I lack the expertise to consistently pick the winners while avoiding the losers. Overall the portfolio doesn’t seem to be a closet tracker as there are plenty of sectors that I have little or no exposure to but by maintaining mainly small-ish positions I avoid the “oh s**t” feeling at 7.00am when I read the morning RNS. Quid pro quo is that when a takeover or some other windfall comes up there isn’t the euphoria of having a substantial gain on a portfolio wide basis. Again, that suits my investing personality.

Overall then, no “right” answer for all investors at all times other than to develop an approach that fits your own circumstances and that you are comfortable with.

Gus.

—————

Footnote: Just read Carcosa’s excellent post above that came up while I was putting mine together. I think you have two investors with more or less polar opposite approaches on the subject of diversification but (hopefully) a shared view that either can be suitable depending on the circumstances of the individual.

Lion Tamer

3rd Aug '18

I know of some people who have 70 or 80 holdings (so they can sleep at night ) but surely you would be better putting this in a tracker fund ?

Correct if you are talking about any of the main indexes, but there are not many ETF options for small cap / AIM. If you are a farmer (as opposed to a hunter) and want small cap exposure, then you may be better off owning a lot of holdings. For the avoidance of doubt, I'd not necessarily suggest this as a good strategy - and random quantities of random quality AIM stocks are certainly not what I do (at least not intentionally).

If it helps, I started out with a mixture of a few blue chip large caps plus a generous dash of main market ETFs - most of the ETFs are still held and doing fine thanks. For fun I started allocating a small corner of my portfolio for "fun money". This has grown over the years and is now about equal to my "safe money" allocation. I hold about 59 lines of investment across four broker accounts, 44 are a mixed bag of individual companies and 15 are ETFs. I buy infrequently, but unfortunately I sell about half as often as I buy, so over time the portfolio just gets bigger. I guess I need to fix that sometime. Some long standing safe shares get little attention, but the fun corner of my portfolio gets inspected and researched almost every day. My portfolio (shares and a small company pension) are my only means of income, and have been for about 2.5 years.

In summary, and without repeating the other excellent comments above mine, I'd suggest you let the number of stocks held grow (to at least the 15 to 20), but try to stop it growing when it becomes a problem to manage (maybe somewhere between 20 and 60, according to your own time and comfort levels).

Disclaimer: Please fell free to ignore all I've said, as I'm a complete incompetent fool still trying to learn from others here.

GrahamWade

3rd Aug '18

As I have a full time job and limited time to review/ manage my portfolio I stick to 20 shares. This gives me enough protection so that if an individual share totally collapses it's only 5% of my capital. To me diversification is more about making sure the shares are in a range of business areas. it's no good having 20 mining stocks because if that market collapses all shares tank. Therefore, I try and limit to 3-4 shares per area. I also force myself to invest the same amount of money (5%) in each share. It's revealing when you think do I want to put £x into this share and you think no! From monitoring these shares I would say 75-80% of the time they don't perform. Works for me and my approach to risk/ reward.. As you can see from the replies there are a wide variety of answers and opinions.and you need to find something that you are comfortable with

Cuthbert C

3rd Aug '18

There is of course no rule that says your entire portfolio has to be invested in individual equities.

My own portfolio currently comprises holdings in:-

cash = 26% of total portfolio
2 retail bonds = 17%
1 pref share = 3%
6 investment trusts = 20%
10 individual equities = 34%

I have been living on my savings and investments for 17 years since early retirement. I have evolved my approach by trial and error and have learned that for me a key factor is my being prepared to sell everything when I feel there is some serious systemic risks.

Like some others here I used to run a very concentrated portfolio with as much as 60% in a single company. And I used to allow high conviction investments to run for many years through periods of weakness and sideways drift. That was a conscious strategy to maximise returns in full recognition of the elevated risk that ensued. Then I pursued capital growth only. I do not do that stuff now. These days I want low to moderate risk and a modest yield and I want to avoid long periods of stagnation.

Looking at my current portfolio I do not lose any sleep over the cash - its a floating buffer which insulates me from any need to sell at the wrong time. It also lets me buy low or top up when it seems like a good idea. Cash might not make me any return but it is pretty darn safe.

Retail bonds provide a decent yield and one of them has also provided a decent capital gain. They are not as safe as cash but they are much more rewarding. I don't spend much time thinking about them. their volatility is very very low.

The pref share is irredeemable so it's like a bond but with no end date. It just churns out a modest yield. Monitoring requirements are low.

The investment trusts provide significant diversification not only between sectors and companies but also between geographical regions. I make a lot of use of John Baron's services for selection and timing of transactions but am not afraid to do my own thing as well. Again I spend little time monitoring or worrying about them. I tend to keep my eye on the discount to NAV and to scan the regular updates issued by the management but it's a low intensity task. Volatility tends to be very low. Of course if you were to look through the IT's to their component parts then in effect I am exposed to several hundred individual stocks - most of which I know nothing about.

The individual equities do take a lot of my time. They are not efficiently diversified - almost half of the 34% is in energy related stocks - these are high conviction ideas. This is where I hope to gain out-performance in terms of capital gains. Volatility can be quite high.

So to sum up, the cash, bonds, prefs and IT's are low volatility and low maintenance.

The bonds and prefs give me a decent base yield which is more than I expect to draw down annually.

The IT's give me a solid base for diversification with exposure to returns of the order of market indices.

The individual equities satisfy my need to work at things, my gaming instincts and my wish to exploit my industry knowledge. This is where the risk and the volatility is in my portfolio. (and the out performance potential too of course). It feels to me that the scale of my exposure to individual equities is enough in aggregate to permit a significant over performance but sufficiently small that I can exit quickly if necessary.

End result, I sleep at night, I have fun, I make enough to live on.

The Phoenix

3rd Aug '18

Hi Carcosa any chance of hearing a bit more about the story of your multi baggers sounds interesting no issues if you prefer not to. Out of interest these days do you hold just direct equities or do you hold funds/ investment trusts on top of your say 15 best stock picks ?

Thanks Andy

Carcosa

4th Aug '18

Andy,

I think you have to be a bit wary of people on the internet claiming multi-baggers. Investing £2000 for a £2000 profit is not going to change someone's lifestyle

It's only when I am as certain as I can be that I invest meaningful money in a share. Restricting myself to 10-15 share portfolio does concentrate the mind but the downside is sometimes over analysing and up not seeing the long term story or being unduly influenced by commentators.

I have generally only owned direct equities but have on occasion owned bonds on the back of the 2008/9 financial crises. eg LLPC at 48p, yielding ~18% ( sold at 150p in 2015). My life changing investment was in Soco International bought at 35p in 2000 (in today's money) and sold around 550p in 2007.

There have been other multibaggers along the way but generally I have had relatively small investments in them; and of course there have been failures too. I have lost 100% of an investment once. That was due to it being a fraud, Meldex International in 2000 (fortunately this was a small position), My one major financial loss was with Iofina in 2014 (about 150k; although if I counted the profits I once has with it then it was a lot more than 150k!). That hurt. That was by far and away my biggest loss in 20 years or so.

Generally though, up until 2012ish I was very much a value investor based on the PYAD approach. For the last few years I have tended towards companies with a compelling long term 'story' and an occasional speculative share e.g. GAN.

FWIW Hutchinson China Meditech (HCM) is my most hopeful long term multi-bagger share. First bought in early 2017. Will be interesting to see where that is 5 years from now. Similarly I have a long term investment with the much misunderstood Avation (AVAP), originally bought in 2013

I tend to eschew the likes of IQE, Fevertree and Boohoo all of which I have owned at one time for perhaps a matter of weeks but sold out of because my Value style investing is still lurking around in me and I have generally (and correctly as far as IQE and BOO are concerned) lucked out by selling at the top of the market. And I really do mean luck. Am happy to sell out of any share and leave something for the next investor.

HTH

Gromley

4th Aug '18

You've had some great responses here tony and I hope they have been helpful.

To reiterate a point that was made previously, I actually think it is a very personal thing and is largely dictated by what type of investor your are. Your original post includes the quote :

My dilemma is I do not know how many stocks to hold (I currently have 30 ) I personally feel this is too much as very difficult to keep track off and to know each company inside out .

This suggests to me that you regard yourself as what I would describe as a "conviction investor" ie someone that only (or at least mostly) holds stocks where you are convinced of the downside protection, the upside potential and of your ability to assess new news and determine if the investment case has changed.

This being the case, then I would say that a smaller number of stocks is appropriate, but - you also need to be totally confident of your abilities to assess those three points.

I also think that there is another risk here and that is that if you decide a more concentrated approach is the way to go, you enable yourself to spend much more time researching your potential investments.

That's a good thing surely?

Indeed it is, but it also creates a risk (which with the benefit of hindsight I know I have fallen foul of in the past) that you subconsciously value the amount of research time you have spent and become (again subconsciously) reluctant to embrace any negatives that you uncover, which essentially mean that you have "wasted your time" - all that research time and no investment.

Personally, that weakness has cost me significant amounts in the past which is why I now run a much more diversified portfolio - I still have some "conviction positions", but they are now not so large that I find it difficult to change my mind and exit if all is not going to plan.

So, diversification is the way that I have personally chosen, others will chose a different path. To me it is all about how you cope with your inner demons.

Cuthbert C

5th Aug '18

Hi Carcosa

don't wish to be overly pedantic but I think you've mis-spoken

You said ".. I have on occasion owned bonds .... eg LLPC…"

LLPC is an iredeemable preference share NOT a bond. Whilst irredeemable prefs share some behavioural characteristics with bonds, they also possess some significant differences.

The Phoenix

5th Aug '18

Thanks Carcosa,

Interesting stuff, I also held Soco but didn't do as well as you out of it think I bought circa 99.
The biggest learn for me recent years is to have a plan before you even get into a stock money management is as much of the game as trying to pick winners.

I look back to some of the horrors i bought in the early days and now shiver.

I also remember Meldrex think it was also known as Bioprogress but seem to remember it four bagging before it all blew up.

Mark Slater has been a big cheerleader for HCM and think he's done nicely out of it in his growth fund. I also think theres a lot of merit in your approach of say trying to get to know 15-20 shares really well so that over time you can get a feeling for when something may be happening out of the ordinary.

Great stuff there are some very clued up traders on here compared to the tools you get on some of the other bulleting boards.

Thanks again for sharing your story.

Edward Croft

6th Aug '18

You should have a read of this - How many stocks should you hold in your portfolio?

tony akram

6th Aug '18

Hi Everyone

Some great feedback , thank you to everyone who has responded , one of the reasons I subscribe to Stockopedia.

Thank you again

Tony

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Tony Akram

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