How many is too many?

[Lawso]

We all know how important it is to diversify - to not have all your investment eggs in one or two baskets. But am I over-diversified?

I've just checked and found that I own 19 NZX and ASX-listed stocks and 11 fixed interest-type products - notes, debentures, pref shares etc. So the failure of any one of the companies concerned wouldn't be a disaster. Conversely, I'm not going to get a lot richer from a jump in any one stock - say a MFT, RYM or RAK - because the jam is spread so thinly.

My biggest holdings are in FBU, AIA, CEN and PFI, which have all done well. The middle group - 2 telcos, 2 banks, 3 LPTs and a handful of industrials - are all pretty solid. Then there are the tiddlers - WID, ICP, VIK - which might or might not pay off one day. Though I do have an exit strategy - not as rigid as people like Phaedrus favour - I don't see much scope for reducing the number of eggs in this basket of listed stocks.

In the f i category, where the average investment is around $10k, I'm thinking of simplifying things by cashing in some and increasing my stake in the best of them, which IMO are S Cant'y Finance, North-South Finance, Strategic and St Laurence. There would be a small cost, sell price and brokerage, but it would be a lot tidier.

I'd appreciate others' thoughts on my situation and how it compares with their own.

[wns]

Hi Lawso,

I would say 5-15 stocks would be about right for most people. More than this and it makes it harder to keep track of everything, plus as you say, good performance from one or two stocks gets diluted in the overall scheme of things.

How many holdings is appropriate depends too on how much investment capital you have. Having $2k each in 19 stocks is way overdone, whereas if you've got say $1m spread over 19 stocks then that's quite different. Even with $1m, I'd probably still have it spread between 12-15 stocks absolute max, and quite possibly between less than 10.

With your fixed interest holdings, I'd probably reduce that to just a couple (3 or 4?). Again, how many would depend on how much money I had invested in them.

I just hold five stocks at present. The most I've ever held at any one time is 6.

[foodee]

quote:by Lawso

I'd appreciate others' thoughts.....

You are obviously an astute and effective investors and therefore my comments may be irrelavent and certainly not suggestions.

Number of stocks (provided you can monitor them) is probabaly not so important as your target total return say x%. Once x or x+ is achieved than it is a matter of refining things to your liking. If you are going for max in everything than that is a different matter!
Seem your sector cover is pretty comprenhensive.

Cash investments - looks like you are aiming at the higher end return with associated risks but you will be the best judge of the scenerio.

For me I have been reducing my portfolio(personal choice at this point in time) - switching to cash. For cash investments, I favour the top tier institutions ie various banks and the local credit union. Being out of the workforce now for 5 years I need the returns to live on and as such maturity terms are set to maintain cash flow through the year.

My annual target is not very ambicious - I just want to be [u]cash flow positive</u> annually - so far that has been the case.

All pretty boring stuff - thus no nightmares!

cheers

[Tok3n]

On the topic

http://www.nzherald.co.nz/topic/stor...ectid=10445976

[Halebop]

Brokers and Fund Managers love Diversification.

I prefer Buffett's term of Portfolio Insurance because it more closely follows insurance concepts - you know it's going to cost money over the longer term but it delivers a degree of certainty for that cost so people are happy to pay (Course every now and then people choose an insurer like HIH in Australia!)

Brokers like Portfolio Insurance because it means you have to own more shares and incur more base brokerage fess. They make more money while the chance of you suffering catastrophic loss and withdrawing from the market is restricted to special bear markets like 1987, the mid 70s, 1929 etc. 'Course the chance of you generating out-sized returns from a portfolio of 25 or 50 shares is very low as well.

Fund Managers like the concept because improved capital stability equates to consistent fee incomes, not because it helps them generate higher returns. They are also keenly aware that their performance is benchmarked both internally and externally, so they don't want to get too far away from the indices on the occasions they fall below par (and over a period when you deduct fees this is going to be quite often).

Portfolio Insurance does not encompass qualitative decision making. In the 90's Buffett surmised that 90% of his book gains were from just a dozen or so investments made over about 40 years. Quantitative research always concludes "Ahah! But by owning 100 shares I'm almost guaranteed to own some of the great companies and how do I pick them before hand anyway?". Qualitative practitioners have troubles reconciling the world view which guarantees mediocrity - an unlikely goal for someone concerned with quality of decision making. We know Buffett didn't own hundreds of companies at any given moment in order to find those special dozen situations so obviously quality of decision making can be more useful that a wider quantity of purchasing decisions.

Historically I've rarely owned more than a few companies at once. Over the last few years as I've developed a more active trading strategy, this sometimes expands to 10 open trades at a time, but these typically represent only a small portion of my wealth (there have been exceptions) and holdings times can be very small with very stringent stop loss criteria due to the more constrained time frames that they are held. In terms of longer term investment - I would still put everything into a single basket if I thought the rewards outweighed the risks - Don't think this has happened in at least 4 years but have frequently invested 30 or 40% in a single share if the liquidity supports easily buying or selling in a timely manner.

On the finance front most New Zealand registered finance companies wouldn't likely meet my risk / qualitative criteria but I've never really worked very hard at holding cash or optimizing returns from cash or debt securities. I trust the prudential requirements placed on banks more than the investment statements of finance companies and very much view cash as a necessary evil to be endured between investments (One day though, maybe I'll still be alive, there will be a 1929 style route and I'd be disposed to fleeing to Government Stock/Bonds in such an instance - the difficulty is knowing which -15% correction is to become a -20% per annum secular cycle).

[Phaedrus]

Lawso, if your biggest holdings are your best stocks, you are doing something right! The reverse of this happens if you average down - your worst performing stocks become your biggest holdings. It is obvious that this is not the way to maximise returns.
In my opinion, 19 is too many, but this is a very personal decision. I aim at around 5 - 10 locally, but it is all too easy to allow this figure to creep up.
There is another factor here that no-one has mentioned yet - brokerage. To minimise this expense, your minimum trade (or holding) should be $15,000. To my mind there is no point in having any small "token" holdings cluttering up your portfolio. Always play for meaningful stakes. If your 'fi' (?fa!) category average is $10k, you must have some very small holdings in there.
Have a good tidy-up. You will feel much better for it.

[Zaphod]

It's also worth evaluating your portfolio from the perspective of holdings within a particular industry. You may own the stock of many separate companies, however if they are within the same industry then perhaps you are not as diversified as you think!

From a personal perspective, I tend to hold a large holding in a relatively small number of NZ & AU companies (8 at the moment). All these companies are within the sectors that either I work-in, or have a fundamental understanding of.

[Lawso]

Great responses. Thanks, people.

The consensus seems to be that 19 listed NZ and Aust. stocks is too many, which I suspected. Trouble is there's now nothing that I want to get rid of - having dropped FTX and DPC at small profits, RMG (disaster), CHA, VCT and WHS.

On another thread Phaedrus has advocated regularly culling your worst performing stock. Perhaps my worst performer over the past year or so has been CAV, wallowing in the 300-350c range. But with capital gains, dividends and restructuring over the past 10 years, my 20,000 CAV have cost me next to nothing and the yield as a %age of cost would be pretty spectacular.

wns: Of course having only $2k worth of 19 stocks would be ridiculous. Apart from the tiddlers I mentioned, I'm not interested in less than $15k worth of any listed stock; my two stars are worth well into six figures.

Certainly I don't need 11 f.i. holdings. I've started to reduce, dumping GPG Finance bonds, which are only paying 8.3%, and intend to reduce further, provided I can do so without dropping too much in the sale process. Incidentally, none of these holdings is worth less than $10k and a couple are considerably higher. I was sloppy when I said the average of these was about $10k.

foodee: You are very conservative with your cash investments but if you're getting sufficient income from them, good luck to you. If you need/would like more, consider the best of the finance companies - UDC, Marac, S. Cant'y, North-South, Strategic, each one very safe IMO, though perhaps not as rock solid as a bank.

Halebop: Thanks for a great contribution. Yes, I like the term Portfolio Insurance. But I like to think I can be adventurous and more successful with my selections, rather than, say, merely buying the index.
You're not keen on the local finance companies. Chacun a son gout, as they say - whatever turns you on.

Phaedrus: One more point. No fear of me "averaging down". I learnt the error of this long ago, as with "hold and hope", largely from you and others on ST!
As for brokerage, it's scarcely a consideration since I started using a Direct Broking call account - $29.90 on trades up to $25k - much better than the 1% I used to pay.

Zaphod: Fair point about industry exposure. I think I'm reasonably diversified. I don't hold any retail stocks, airlines, IT hopefuls and no resources other than through WID. With property companies, banks, telcos and various industrials like FBU, STU, NPX and CAV I think I've got a reasonable spread. Like you, I prefer to invest where I have a reasonable knowledge of the company or its sector and, preferably, some familiarity with its top people.

But this doesn't have to be all about me. It's always interesting to read about others' holdings and attitudes. More please!

[Lizard]

Well I am still a big fan of the Peter Lynch ("One Up on Wall Street") approach. He was known for holding a large number of stocks - into the hundreds I think from memory. He bought every stock he found that met his criteria - then weighted 80% of his funds into the ones which became favourites.

Maybe some people can hold 5 stocks and follow 50 and rotate into the best ones, but personally, I always find it harder to follow stocks I don't hold, so my chances of buying them become rather slim.

Also, from a diversification viewpoint, I happen to have become a trustee for funds belonging to a number of other family members who both require capital appreciation, yet do not have much tolerance for volatility. Diversification has been essential to my wellbeing in these circumstances!

[Halebop]

quote:Originally posted by Lizard

Well I am still a big fan of the Peter Lynch ("One Up on Wall Street") approach. He was known for holding a large number of stocks - into the hundreds I think from memory. He bought every stock he found that met his criteria - then weighted 80% of his funds into the ones which became favourites.
Maybe some people can hold 5 stocks and follow 50 and rotate into the best ones, but personally, I always find it harder to follow stocks I don't hold, so my chances of buying them become rather slim.

From a statistical point of view, it's the 80% favourites that count. Owning hundreds in the end makes little difference if 80% of holdings by value were 5, 10 or 20 companies.

Unless one of those tiny minority holdings fluked a 200x return, their overall influence will be minor yet they could well absorb just as much management and administration time as the big fish. Peter Lynch has risked failing a key tenet of business excellence in the 80/20 rule. For a lone investor, this approach is impossible to emulate until you start appointing analysts and sector managers to manage your unwieldy portfolio. I'm not trying to debunk his qualitative analysis approach which demonstrably delivered results and wonder if his approach didn't stem from pre-internet times when being a minor share holder was the easiest way to build an investment research catalog?

quote:Originally posted by Lizard

Also, from a diversification viewpoint, I happen to have become a trustee for funds belonging to a number of other family members who both require capital appreciation, yet do not have much tolerance for volatility. Diversification has been essential to my wellbeing in these circumstances!

I think this ably demonstrates some of the pressures similar to those that Fund Managers feel!