Monday, September 24, 2018

How Many Stocks, Is Too Many Stocks?

Phone-a-friend Gremlin here to discuss my portfolio size.  There have been numerous articles posted on websites as to how big a portfolio should be, along with talking heads on TV stating that X number of stocks should be the maximum.  Some people on the internet claim that a portfolio of five (5) stocks is sufficient to make one diversified.  Others state 10, 15, or 20 as their numbers.  These hosts include professionals and amateur internet enthusiasts who are all about making wise long term OR extremely speculative short term investments.  My answer is, that their advice is best for themselves, but it is dated.

Currently my portfolio contains 58 stock positions across my taxable, Roth, and IRA accounts.  They run the gambit of industries, with multiple names in most sectors.  It is as if I am building my own personal index fund, which pays me a higher yield than an index.  Portfolio management is minimal, I rarely sell a stock, and my expected holding period is for as long as possible.  Considering my view point, versus that of others, why am I happy to hold many positions?

My answer is threefold.  First, the elephant in the room that modern professional advisers try to brush off is the internet.  The fact is I could have 200 stocks in my portfolio, and as long as I keep my apps on my phone up to date, I would never miss a news piece, dividend issuance or anything else (if I chose to be that plugged in).  The press release happens and within minutes the notice hits my email.  This was not possible 20 years ago.  So to borrow a phrase from a large investment adviser, I don't need anybody to 'make sense of investing' for me.  I can do it faster than they can, reading the same things that most of them do (sure some in high finance have special access, but the information gap small and closing all the time).  So tracking my 58 positions is pretty easy.

Second, I don't chase momentum or yield.  Those kind of plays require constant attention, tracking daily changes even, or risky bets on companies that are always dancing near a cliff.  By focusing on quality stocks that will maintain or increase their dividends with or above inflation, I eliminate the need to buy and sell (aka feed the brokerage).  So having a bigger portfolio does not increase my handling of it all, unlike some more streamlined portfolios that aggressive chase returns upfront.

Third, and most important to me, is that I memorize stuff rather quickly.  So when I research a company I can quickly understand what they do.  After that I can analyze if the company would be a good investment for me at the moment.  For a long time many educators (I know a lot of people are in teaching...) told me that memorization is not as powerful of a skill as understanding and critical thinking.  I find that argument to be a fool's errand, as they are each powerful in their own right for different things.  Specifically, by memorizing facts I can create short cuts - in terms of finding and accessing the right information.  It also helps me track a company over time, as a stock is easier to track the more familiar you are with it.  Knowledge is cumulative, so the

So in the end, how big should a portfolio be?  My answer is as big as you want it to.  Sure not every stock will be a home run, but home runs aren't the only way to score points.  Consistency is the key to making my portfolio become my personal index fund, which reports to me.

- Gremlin

1 comment:

  1. You captured all the fundamental issues and I concur with your conclusion. The only problems I've encountered with 218 issues is it's like turning a battleship when allocations are adjusted or priorities shift. Also, M&A activity or corporate actions may not provide outsized results for the portfolio.