Structuring a portfolio??

[Ginger_steps_]

Hi all,

Just wandering what the experienced investors recommend for structuring a portfolio? I understand that diversifying and spreading the risk is a good idea. However on the other end of the spectrum shares in too many companies mean you begin to average the market... So how many is too many for the NZX? My main holdings in volume weighted order are SUM, XRO, ATM, HNZ, SML, EBO, PEB which account for 80% of my capital. TEL, WYN, FRE, SNK and WDT account for 20%. Have I gone overboard here?? I've accumulated these shares over the past year and am sitting 24% in the green as of today, however am starting to think I have made some silly decisions. Would appreciate some advice in regards to this as well as what thoughts of my portfolio are in gerneral?

I have emptied my savings account and hope to invest over the next 30+ years, pulling out a house deposit at some point and an overseas holiday every now and then if all goes well. Obviously I have a taste for risk/speculative/gambling but might not really understand the extent of it either... hope this doesn't turn round to bite me quickly!

Moosie - you seem to be a sleepless ST machine who helps the newbs out a bit - what do you think?

Ive started reading the intelligent investor which thus far has told me Im doing just about everything wrong! oh well

Onwards and upwards!

Ginger

[born2invest]

Just wandering what the experienced investors recommend for structuring a portfolio? I understand that diversifying and spreading the risk is a good idea. However on the other end of the spectrum shares in too many companies mean you begin to average the market... So how many is too many for the NZX?

Warren Buffett & Charlie Munger advocate that 7 stocks is enough diversification. I currently own 2x stocks on the ASX and that's all my investments apart from cash that I hold. I see no point investing into an overvalued company I know little about just for the sake of diversification.

My main holdings in volume weighted order are SUM, XRO, ATM, HNZ, SML, EBO, PEB which account for 80% of my capital. TEL, WYN, FRE, SNK and WDT account for 20%. Have I gone overboard here??

Only you can make that call if you have overdone it. Personally, for me 11 stocks is too much. My 11th best idea would be no way near my 1st best idea.

I've accumulated these shares over the past year and am sitting 24% in the green as of today,

11 stocks over the past year seems like a lot. Just because you are up 24% this year doesn't mean much as the whole market has gone up around the same amount. Don't confuse brains with a bull market my friend.

however am starting to think I have made some silly decisions.

Such as?

Would appreciate some advice in regards to this as well as what thoughts of my portfolio are in gerneral?

I would go through each individual stock in your portfolio and decide on whether you would buy them again if you had to do it all over again, if not, sell it.

I have emptied my savings account and hope to invest over the next 30+ years, pulling out a house deposit at some point and an overseas holiday every now and then if all goes well.

You have emptied out your entire savings and bought 11 stocks in the past year. To me, it sounds like you got a bit of itchy feet and had to buy everything at once. Once again, I'd advise to look through each individual stock and ask yourself if you still want to keep it.

Obviously I have a taste for risk/speculative/gambling but might not really understand the extent of it either... hope this doesn't turn round to bite me quickly!

Can't help you out here sorry mate. I'm not a speculator, I'm an investor and dispise gambling.

Ive started reading the intelligent investor which thus far has told me Im doing just about everything wrong! oh well

Good book to read. I'd advise asking yourself what kind of investment strategy you want to follow and then learn all you can about it.

Everyone goes through the initial stages of investing, making mistakes, learning, wishing they had done this, hadn't done that, etc. The key is to learn from your mistakes and use the skills to make better decisions in the future.

[gv1]

Warren Buffett & Charlie Munger advocate that 7 stocks is enough diversification. I currently own 2x stocks on the ASX and that's all my investments apart from cash that I hold. I see no point investing into an overvalued company I know little about just for the sake of diversification.



Only you can make that call if you have overdone it. Personally, for me 11 stocks is too much. My 11th best idea would be no way near my 1st best idea.



11 stocks over the past year seems like a lot. Just because you are up 24% this year doesn't mean much as the whole market has gone up around the same amount. Don't confuse brains with a bull market my friend.



Such as?



I would go through each individual stock in your portfolio and decide on whether you would buy them again if you had to do it all over again, if not, sell it.



You have emptied out your entire savings and bought 11 stocks in the past year. To me, it sounds like you got a bit of itchy feet and had to buy everything at once. Once again, I'd advise to look through each individual stock and ask yourself if you still want to keep it.



Can't help you out here sorry mate. I'm not a speculator, I'm an investor and dispise gambling.



Good book to read. I'd advise asking yourself what kind of investment strategy you want to follow and then learn all you can about it.

Everyone goes through the initial stages of investing, making mistakes, learning, wishing they had done this, hadn't done that, etc. The key is to learn from your mistakes and use the skills to make better decisions in the future.

Wow, great advise. I have learnt the hard way, wish I knew you earlier.What do you do for job born2invest. Big salute.

[peat]

I seem to think the Intelligent Investor provides Grahams view on the number of stocks sufficient to gain the benefits of diversification.
Also one needs to consider the correlation between the stocks themselves to maximise the benefits. no good having stocks all in the same sector.

Perhaps try and understand the concepts behind modern portfolio theory so as to glean how to conceptually (if not mathematically) apply to your own situation even if you disagree with the tenets or assumptions of that theory .
http://www.investopedia.com/walkthro...heory-mpt.aspx
http://en.wikipedia.org/wiki/Modern_portfolio_theory

The following chart graphically represents the reduction in risk, as measured by standard deviation, vs no of stocks in the portfolio, so gives you some idea what might be a suitable number of stocks to hold.

Diversification Capture.JPG
Obviously the more stocks the less risk to the portfolio from each specific stocks unique risk (cf market risk which cannot be diversified away) but this is of course met with increased work to manage them.
Also one needs to consider the correlation between the stocks, this could be done mathematically but even just considering them by sector would be a start. The higher the correlation the less diversification one achieves by including that extra stock.

[Longhaul]

Like you I only started this year and it was lucky for us to start in a bull market. I do worry that my expectations have been set a little high though!

Anyway, a couple of lessons I've picked up that may or may not be useful:

Don’t buy a share that you wouldn’t want to hold for the long term

The best stock to buy is probably one you already own (thanks SparkyTC)

Focus on future value. The price you paid is irrelevant to how the stock is going to perform. (again, thanks SparkyTC)

[born2invest]

Wow, great advise. I have learnt the hard way, wish I knew you earlier.What do you do for job born2invest. Big salute.

I work at The Warehouse in logistics.

[born2invest]

I seem to think the Intelligent Investor provides Grahams view on the number of stocks sufficient to gain the benefits of diversification.
Also one needs to consider the correlation between the stocks themselves to maximise the benefits. no good having stocks all in the same sector.

Perhaps try and understand the concepts behind modern portfolio theory so as to glean how to conceptually (if not mathematically) apply to your own situation even if you disagree with the tenets or assumptions of that theory .
http://www.investopedia.com/walkthro...heory-mpt.aspx
http://en.wikipedia.org/wiki/Modern_portfolio_theory

The following chart graphically represents the reduction in risk, as measured by standard deviation, vs no of stocks in the portfolio, so gives you some idea what might be a suitable number of stocks to hold.

Diversification Capture.JPG
Obviously the more stocks the less risk to the portfolio from each specific stocks unique risk (cf market risk which cannot be diversified away) but this is of course met with increased work to manage them.
Also one needs to consider the correlation between the stocks, this could be done mathematically but even just considering them by sector would be a start. The higher the correlation the less diversification one achieves by including that extra stock.

I personally think modern portfolio theory is a load of rubbish and you will reduce your returns or mirror the index if you follow this method.

You are better off learning about individual companies and gaining an edge over everyone else by knowing the company better than they do.

[born2invest]

The price you paid is irrelevant to how the stock is going to perform

Are you serious??

The price you pay for a stock is a direct relation to the returns you are going to achieve!

[Snoopy]

Hi all,

Just wandering what the experienced investors recommend for structuring a portfolio? I understand that diversifying and spreading the risk is a good idea. However on the other end of the spectrum shares in too many companies mean you begin to average the market.

Not a bad thing in itself. Most investors and traders end up not beating the market. A low cost index fund based on the market will ensure that long term you become an above average investor.

.. So how many is too many for the NZX? My main holdings in volume weighted order are SUM, XRO, ATM, HNZ, SML, EBO, PEB which account for 80% of my capital. TEL, WYN, FRE, SNK and WDT account for 20%. Have I gone overboard here?? I've accumulated these shares over the past year and am sitting 24% in the green as of today, however am starting to think I have made some silly decisions. Would appreciate some advice in regards to this as well as what thoughts of my portfolio are in general?

No you haven't gone overboard. You have what I would call some speccy shares in there: XRO, ATM, PEB, SNK and WDT. But apart from perhaps having too many in the 'software' space, I would say this is the way to do it. Some would say get to know your speccy shares first, but I think you will find this very hard to do without encountering innocent hyperbole along the way. Keeping the speccies diversified into different sectors is IMO the right approach.

Meanwhile your 'conservative' shares look nicely diversified around industry groups too. I would say you are off to a good start. Well done.

SNOOPY

[peat]

I personally think modern portfolio theory is a load of rubbish and you will reduce your returns or mirror the index if you follow this method.

You are better off learning about individual companies and gaining an edge over everyone else by knowing the company better than they do.

MPT is a form of diversification. Under certain assumptions and for specific quantitative definitions of risk and return, MPT explains how to find the best possible diversification strategy.
If you disagree with the assumptions then yes you will disagree with the theory, but the question related to how to structure a diversified portfolio and MPT offers a solution to that.