Hi, I'm just looking to gauge your opinions on the maximum number of different stocks to hold in your portfolios.
20ish seems reasonable to me, providing they are diversified, but how/where do you draw the line?
Thanks
Hi pjohn.
Some thoughtful responses here and I would agree with the sentiment that you need to find what works best for you. How much unemcumbered capital do you have? Do you expect/hope to have? Where are you in your life cycle - early days with high expenditure commitments on family and mortgage etc., or in retirement living off investment income and thinking about estate management? What’s your attitude to risk/stress level when things go bad? How much time do you want to spend managing the portfolio? How good a stock picker are you (and as you go along, be honest about just how good a stock picker you really are!). What is your intended strategy - short term trading of a few positions to scalp some trading profits or buy and hold (possibly forever) companies that you are prepared to research and get to know really well.
Having held shares for over forty years I’ve oscillated between the extremes of owning just one share (a gift from my late father in British American Tobacco (LON:BATS) in the early 1980’s ) to my current position of having over 200 individual shares (as well as a range of funds, both active and passively managed in addition to a spread of Investment Trusts, ETFs and even as of last week a discretionary Macro Fund (basically an investment in a short/long spread betting account following global market indices run by a full time manager)).
Much of the academic theory and the word of sages such as Warren Buffet talk of “diworsification” - state that going beyond a certain number of holdings (20 or so does seem to be a magic number for many) will dilute the benefit of your best ideas without achieving an additional benefit of spreading risk. It will also give you a headache trying to keep track of everything and as Wilkonz comments you probably just end up with an expensive tracker fund. One observation I will make is that it is so much easier now with the internet newsfeeds and software such as Stockopedia to keep track of everything - although I may have 200 stocks, I probably look at no more than 10 or so a day as and when they report or there is some relevant breaking news. This was simply not possible (at a reasonable cost) 20 years ago. It’s also so much easier to keep track of dividends and CGT liabilities for tax purposes than it used to be (not so long ago every dividend came as a cheque in the post that had to be paid into the bank and manually logged to calculate the year end tax liability). From a practical point of view there is probably a minimum size holding to consider - at say £10 per trade in and out (plus stamp duty if applicable) of a position - it may not make sense to invest less than say £1,000 per trade, possibly a lower threshold if you are prepared to buy and hold longer term, but otherwise I haven’t had an admin issue with a large number of individual holdings.
I can accept the inefficiency arguments but going back to the original comment, I find my approach works for me. I’m retired, have a fairly good sized pot of capital; limited financial commitments and a reasonably frugal lifestyle; interest in the markets and individual companies but don’t want to be a slave to watching the screens every minute of the day; a strong aversion to large (downward) swings in value in a particular holding but content to go with the flow of wider market ups and downs with the view that long term the direction of travel is upwards. I’m an excellent stock picker - until I’m not, which is often - so while I like to take the occasional punt with a “story” stock, I’m long enough in the tooth not to bet the house on it. I’ve found using the Stocko factor based approach is beneficial - until it isn’t. Somehow, losing 30% on a punt in a speculative oil and gas explorer is less irritating than when an apparent Super Stock issues a profit warning and tanks - it doesn’t itch so much if you have enough of them that the occasional loss doesn’t whack the total portfolio value.
All told, I suspect my approach is quite unusual (extreme?) but it works for me. Let’s face it, it is basically an index tracker and I should’ve saved a whole heap of time by investing in a global tracker fund 40 years ago (if such a thing existed then). But where‘s the fun in that?
Best of luck.
Gus.
