# Less diversity = better portfolio (maybe)



## Tannin (1 September 2012)

These last few months, I've been thinking about portfolio diversity. 

In the past, at any one time I've usually had about a dozen stocks in my modest little portfolio, and selected those dozen stocks with an eye to minimising my exposure to any single risk. This is (of course) standard practice, straight out of Investing 101. 

But lately I've been thinking about it. I often wish I'd put more of my money into my good ideas that worked out and went well. Why not - if I really think it's a good idea - put some  real money into it?  

And often enough, my other ideas don't work out too well, and I wind up selling up at a loss or sitting watching the investment sit there for a long time while I wait for the darn price to go back up to around about what I paid. 

Anyway, I'm down to just five stocks now - two large holdings (large by my standards, anyway) each a bit more than a third of my total portfolio, with the remainder split between three small holdings. 

Yep: if disaster strikes either of my two large holdings, I'm in the soup. On the other hand, you can rest assured that I follow those two companies very carefully - much more carefully than I ever could do with a dozen or more different stocks to worry about. And they are my two very best investment ideas. If they do well, I make some real money. If I sold them down for "safety", I'd be putting the money into stocks I have less faith in, stocks I judge less likely to keep my money safe and bring me in as good return. 

Over the next month or three, I more-or-less aim to consolidate a fraction further. I'm sort-of aiming to hold just three stocks - but that's an aspirational target only. I don't want to sell any of my three small holdings at present, and I'm not sure that I'd regard any of them as good enough to be a "main" holding like the big two. So, in practice, I imagine that I'll keep them either until the investment ideas mature and I can take my profit, or else just until I have a better idea and need the cash.

Anyway, there you have it: my "anti-diversity" strategy. Hold a very small number of different stocks, but pay lots of attention to those two or three!

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How do you feel about diversity? 

How many stocks do you typically hold? 

What is the largest holding you have? (10% of your entire portfolio? 5%? 50%?)

Do you often wish you'd gone in harder, with a bigger stake? 

Do you sometimes find that you lose track of your smaller holdings and you're not on top of their progress?


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## So_Cynical (1 September 2012)

My Portfolio size is open, i have an investment rule of re-entering and averaging down into held stocks as a priority and as a result of this i have found that my portfolio size has stalled at around the current level of 21 > 24 stocks.

I can understand wanting to keep it small and concentrate your efforts etc...but i have found that the more stocks i hold the more opportunities come my way, just in the last 6 months for example i have lost a stock to a very profitable take over, received 1 special dividend and have been able to buy a bottom due to my held stocks, money allocation priority rule.

In stead of focusing on 3 or 5 stocks i focus on 20 to 25 and take an interest in another 100 or so...its not to hard if your not looking in to much detail and just focus on the bigger picture.

3 stocks could work great depending on the 3 stocks and the timing....as would 25 stocks depending on the stocks and the timing  25 stocks simply gives more scope IMO.


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## burglar (1 September 2012)

Tannin said:


> How do you feel about diversity?
> 
> How many stocks do you typically hold?




Diversity compensates for naivity but does not protect against Global Financial Crises.
The cliche goes, "Put all your eggs in one basket and watch that basket very closely"

I typically like 3-6, but currently hold 8 (some just don't want to sell! Know what I mean?)


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## tech/a (1 September 2012)

*Go where the money is and go there often.*

Bull markets support all forms of trading.

Bear and ranging markets demand specific trading methods.
There is a time to be diversified and a time to put everything in one
Basket.


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## springhill (1 September 2012)

Tannin said:


> How do you feel about diversity?




Diversity is good when you are diversifying for the right reason. Diversity for diversity's sake is not good.
Emotion is a downfall in trading/investing.
Don't worry about what you *feel* you need to do, worry about what you *need* to do.



Tannin said:


> How many stocks do you typically hold?




Less than 10 ideally.



Tannin said:


> What is the largest holding you have? (10% of your entire portfolio? 5%? 50%?)




I invest a roughly even amount, percentage portfolio size is determined by profit/loss and profit/loss taking.
Largest holding ATM is RFL (30%) secong largest PVD (15%)



Tannin said:


> Do you often wish you'd gone in harder, with a bigger stake?




Yes with the wins, no with the losses.
Hindsight is always 20/20.



Tannin said:


> Do you sometimes find that you lose track of your smaller holdings and you're not on top of their progress?




If I have 10 or less stocks and am unable to keep on top of that many, time to head off to the funny farm.


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## So_Cynical (1 September 2012)

tech/a said:


> *Go where the money is and go there often.*
> 
> Bull markets support all forms of trading.
> 
> ...




Now i know your not talking about an all or nothing single basket?


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## tech/a (1 September 2012)

So_Cynical said:


> Now i know your not talking about an all or nothing single basket?




At the moment I am.
Dont have a portfolio.
So amusement trades
But my solid trading is *solely* on the FTSE index.

If things turn bullish then strongest sector/s load em up.


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## cynic (1 September 2012)

tech/a said:


> At the moment I am.
> Dont have a portfolio.
> So amusement trades
> But my solid trading is *solely* on the FTSE index.
> ...




+1

Over the past few years, the FTSE has been far better behaved (in respect to my preferred trading style) than the other major international indices.

Back in the good old days (pre GFC) I used to increase the weighting of certain of my portfolio stocks according to the success rate of each particular stock. Regular performers thereby gradually became the larger components of my portfolio. I sold my last such holding some time ago and am currently disinterested in (individual) stock investment given the current economic climate.


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## sinner (2 September 2012)

Diversity:

It's one of the fewly available investing "free lunches" as the rebalancing mechanism generates returns.

Define "better portfolio", from a risk perspective you can use stock diversity to avoid ideosyncratic and secondary risk and asset diversity to avoid systematic risk. A portfolio which doesn't avoid these risks may outperform during a bull market but will run significant risk of ruin during any risk event and with less diversity you're proportionally exposed to risk events.

Simple example:
Invest in CBA:
* Ideosyncratic risk: Something could happen to the bank individually, regardless of other banks.
* Secondary risk: Something could happen to the bank sector individually, regardless of other sectors.
* Systematic risk: Something could happen to the financial system.

Invest in ASX Financials Index:
* Ideosyncratic risk: Limited to individual portfolio weights in stocks.
* Secondary risk:  Something could happen to the bank sector individually, regardless of other sectors.
* Systematic risk: Something could happen to the financial system.

Invest in ASX Market-cap Index:
* Ideosyncratic risk: Limited to individual portfolio weights in stocks.
* Secondary risk:  Limited to individual sector weights in stocks.
* Systematic risk: Something could happen to the financial system.


Invest in asset class portfolio (Gold, Bond Index, Stock Index, Cash, rebalance quarterly):
* Ideosyncratic risk: Limited to individual portfolio weights in gold, bonds, stocks, cash
* Secondary risk:  Limited to individual sector weights in stocks, bonds.
* Systematic risk: Limited to portfolio weight in stocks, bonds, cash.


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## ENP (2 September 2012)

Tannin said:


> How do you feel about diversity?
> 
> How many stocks do you typically hold?
> 
> ...




- I'm not a fan. I don't think anyone got rich on their 10th best idea. It is usually their first/second ideas that are the best. 

- I hold anywhere from 3-8 stocks. Anything less and it's very dependent on a single company. Anything more than 8 and I don't feel I get any further benefit for the extra administration and time required to research and keep updated with the company or industry. 

- My largest holding is about 45% and I'm currently holding 4 companies. 

- No. I've made a few investing mistakes but this is not one of them. If my #1 stock is in my opinion the best investment out there, why invest in something that is my 5th favorite for the sake of it?

- To a certain extent yes. I'd much rather spend my limited hours after work and in weekends researching more into my 1st or 2nd favorite stocks than my 7th or 8th favorite stocks. Therefore, my holdings in my least favored stocks don't get as much attention and I may overlook something. I'm still pretty clued up on the companies compared to any old stock out there though. 

Overall, I think concentrating your portfolio is a better approach for me, as it makes me think much longer and harder about investing in the company before I buy it. I have to be very selective of which companies make my portfolio as I only have room for the very best. I'd much rather buy a brilliant business once than fluff around with several mediocre businesses just to make up the numbers or to diversify into certain industries.


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