John Lee, or Baron Lee of Trafford, believes that ‘few investors apply much consistency or logic to the creation of their personal investment portfolios’. Indeed, John Lee (Britain’s first ISA millionaire) thinks that the portfolio of the average investor probably looks a bit like ‘a dog's breakfast', with ‘no obvious theme or structure’ and a number of shares that were bought because City columns said that they were ‘well worth a punt’. Does this sound anything like your portfolio? Even if we do read share tips with a pinch of salt, there is no harm in taking advice from an ISA millionaire. So we’ve summarised the ‘Constructing a portfolio’ chapter of John Lee’s excellent book, How to Make a Million - Slowly. Lets explore what his portfolio might look like.
How many stocks should investors hold?
Warren Buffett, who became the world's richest man slowly, suggests that investors should invest in more concentrated portfolios. While Buffett proclaims that 'diversification is a hedge for ignorance', John Lee takes a different approach. He likes to 'hold around 35 different stocks', although he does warn that too much diversification is unnecessary. This is because the process of monitoring and researching 40 or more companies 'can be quite demanding' in terms of time and energy.
Should investors have an equally balanced portfolio?
Lee does not hold an equally balanced portfolio. He says that his 'stocks vary significantly in value, probably by a factor of up to ten'. This is partly because many of Lee's longer-term positions have grown 'substantially over the years' to take up a bigger portion of his portfolio. Lee also adopts a wait and see policy, whereby he does not invest large sums in a company until he gains a deeper understanding of a firm's business model. In addition, Lee needs to take smaller positions in many small-caps simply because 'there is often a limited market in their shares'. He therefore needs to 'make up to a dozen or more purchases before building to the size of holding he desires'.
Should investors diversify in overseas stocks?
John Lee does 'not bother with overseas holdings'. This does not mean that International diversification is unimportant. Many UK stocks are heavily exposed to British economic and political factors. A more internationally diversified portfolio has the potential…
