Not too long ago, I’ve shared with you my pension holdings. I’ve received $108K as the commuted value of my pension plan in September and I’m currently in the process of investing the whole amount in equities. So far, I have 14 positions for 76K invested for an average of $5.4K in each holding. At this pace, I will buy 6 different stocks and complete my portfolio with a total of 20 holdings. This was the plan how along: I think investing in 20-22 stocks for a 100K portfolio is the best strategy. Albert from the Stashing Dutchman asked me how many companies I wanted to hold in this portfolio. He suggested I would have easily gone up to 30 different positions. As I manage the rest of my life toward minimalism (I’m not a “real one yet”, I admit”); I tend to prefer a smaller amount of holdings for my portfolio. Here are the main reasons why I think less is better.
#1 I want my decisions to matter
What’s the difference between a portfolio of 100K with 50 companies and one with 20 companies? Each decision matters. If you buy 50 stocks with your money, each position will worth about 2% of your portfolio. Therefore, even if a stock plummets by 50%, your portfolio will only suffer a 1% loss. However, with 20 holdings, each position represents 5% of your portfolio. The 1% loss created in the first example would only require a drop of 20% of any holdings in the second portfolio. When I select a company to be part of my investment, I am sure it will perform over time. For this reason, I also want to make sure it shows. I don’t want to “hide” a few gambler’s picks in my hand and pretend they don’t matter because I have 47 others stocks that will compensate for my bad choices.
#2 Holding 50 stocks gets you closer to any dividend ETFs
All right, I’m exaggerating here. Commonly known dividend ETFs like the VIG (Vanguard’s Dividend Appreciation, 181 holdings), DVY (BlackRock’s iShares Select Dividend ETF, 100 holdings) and SDY (SPDR S&P Dividend ETF, 108 holdings), hold a lot more positions than 50. Still, the more position you add to your portfolio, the closer you get to ETFs results. At one point, one must ask if its time is well invested if it’s only to replicate the work of others. By investing his money in a ETF, he would get the same results, but would free-up all his time allocated to investing.
#3 Time is the most valuable currency of all
I give a high value to my time. I enjoy spending time with my children and wife more than anything else. The reason I quit my job and build my company instead is to spend more time with them. If I had to follow 50+ holdings, I would technically take time away from my family to do so. I use the word technically since I already follow about 100 companies for my membership investing site; Dividend Stocks Rock. I’m blessed by the fact that portfolio management has become my main activity! But for you my readers, following up to 50 companies would mean one of the following:
#1 Taking extra time to follow all your holdings
#2 Skipping on important news that will affect you portfolio
#4 There isn’t 100+ companies trading at discount
When you have money to invest on the stock market, it sometimes feels like you have free money to spend at the mall; you feel the need (read urge) to spend it and everything becomes a great deal. You and I both know this isn’t true. If you are a serious investor; you do have an investing strategy. This strategy will guide you through a specific list of buying options. You will not find multiple investing opportunities within your reach. If you invest in 50+ companies, chances are you will pick a few at a premium price. I’m not sure it’s the best strategy.
#5 The number of holdings grow rapidly when you have more than one account to manage
My investing life used to be simple a few years ago. I had my pension plan where most of my savings was invested in without me having any word on how it was managed and I had a small retirement account where I could invest a few more bucks. This retirement account was the only investment account I had to manage. Today, this account is worth 73K and shows 13 different holdings. Then, I started an account for my children tuitions where there is now another 14K spread across 5 companies (including 4 companies that weren’t in my retirement portfolio). And this year, I have another 108K to invest in a pension account. So far, I added 14 companies in this portfolio and a total of 12 new positions. Therefore, across all my portfolios, I have now 200K invested with 29 different companies. I also have about 30K left to invest in potentially 5-6 more holdings. This could easily bring my total holdings to 35. This is a reasonable amount of companies, but I wanted to show you how fast a few different account could multiply your holdings.
I am already managing my retirement account and my pension account to show the same purpose: retiring wealthy. But sometimes I have to remind myself they are 1 portfolio separated into 2 different accounts. Manual consolidation has its limits!
How many stocks for a 100K portfolio?
I’ve always invested in stocks with the idea that each position should worth about 5% of my holding. I wanted to make sure each stock contribute to my return and that if I hit a home run, it was going to show. I know that other investors rather have a more diversified portfolio and aim at less than 2% weight for each company. I’d like to know where you stand.
Free Webinar Replay
In this next webinar, “Should You Buy Stocks Now? 3 Steps Process to Avoid The Biggest Mistake of Your Life,” I will cover step-by-step how I invested my lump sum of money. If you read this article and you’re passed the date, register to watch the replay!
This webinar is for you if:
- You are waiting for the next crash to invest.
- You are looking for opportunities in this market.
- You struggle to invest as everything seems overvalued.
- You have money available, but you don’t know how to invest it.
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The webinar will be hosted on September 12th at 1PM EDT. If you register, you will have access to a full free replay (at anytime).
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Topic: Should You Buy Stocks Now? 3 Steps Process to Avoid The Biggest Mistake of Your Life
Date: Replay
Description: In this webinar, I’ll walk you through my investment process that I used to successfully build a portfolio in this crazy market. I went through 2018 without blinking as my portfolio ended the year with a positive return of 5.5%. As of August 20th, my portfolio was at $152,707.51 for a profit of $44,345.32 or $40.9% (18.7% CAGR over almost 2 years).
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Forward this article to your friends, I’m sure you know someone who is struggling to invest right now.
I try to have enough of each individual stock that when the dividend drops it buys at least a share with the the reinvestment. I’ll just continue my buys like that until the free cash is gone.
I like the idea of buying additional shares on price drop. This is a good way to build a solid portfolio… with higher yield!
I agree with your assumptions, Mike. My 7 figure portfolio is comprised of 32 positions, of which 25 are in good dividend paying growing companies, and about 7 well diversified index funds. We have been contributing the maximum (to access the grant) to our 3 grandchildren’ RESP since their birth and that account is all index funds. They are 15, 8 and 5. Index funds in a way guarantees the market. We have high hopes for them. A higher education is of the best gift to our grand kids!
Very well planned Michel!
You are right; giving children all tools they need to do what they love in life is the best gift ever (I hope mine will understand that in a few years! hahaha!)
Academic research suggests that after about 20 stocks in a portfolio (assuming they are a diverse group from different industries), diversification benefits drop off dramatically from adding more stocks to the mix. That sits pretty well with your 5% allocation. Knowing you have a finance and investment background suggests to me you know this too and operate to that philosophy. I am from the other camp you mention and feel comfortable closer to the 2% allocation per stock. Tom
Hello Tom,
I did know and I also had the opportunity to follow many professional managers throughout my career. The best ones rarely had more than 30 holdings and they were managing billions. The problem with their situation is that heavy money isn’t moved easily (try to sell for $50M of shares of the same company without moving the market!).
Cheers,
Mike
Mike, thank you for the blogpost. Also thank you for the mention, haha, was very surprised when I saw my name :). Personally I’m aiming for 20-30 stocks, as that should give me enough diversification. But I could see my portfolio grow a little wider with some additional smaller positions. I’m still in the early stages of building my portfolio though, so not sure what my portfolio will eventually look like, we’ll see.
– SD