Diversification

[cif5000]

Not diworsification.

Like to collect some inputs/ideas on the right level of diversification (if there is one) for an investor. How many stocks should one hold? Any magic number and why? Should the mental database be used as a limit instead? How about the capital base? And the amount of time on hand?

[Cheng]

10k capital, maybe 2 holdings
20k, 3-4 holdings
50k, 5 holdings
100k, 6-8 holdings
1mil, 10 holdings
2mil, 10-15 holdings

These are what I would do as my capital grows larger, they are merely guidelines, no hard and fast rule. The purpose of diversification is to reduce unknown/unexpected risk, eg. company frauds, natural disasters. When losses do occur, diversification will allow the individual to spread the risk, on the assumption that stop losses or strategies to exit are in place.

At the same time, we don't want to over-diversify as we want the returns on individual holdings to show meaningful impact on the overall portfolio.

We should also be flexible on how we allocate capital. More weight should be placed on bets with a higher probability of success. eg. 10K capital, different people may allocate differently, 6:4, 5:5, 8:2.

It will definitely vary among individuals, how they manage risk and how much can they stomach.

Cheng

[kennynah]

it always amuses me that there are many who like to reinvent the wheel when this business has been around for almost a century...

to properly diversify stocks positions, all one needs to do is to buy a sector or market index... that represents a total diversification across the industry or entire market... isn't it?

[Cheng]

it always amuses me that there are many who like to reinvent the wheel when this business has been around for almost a century...

to properly diversify stocks positions, all one needs to do is to buy a sector or market index... that represents a total diversification across the industry or entire market... isn't it?

True, short and sweet. What I'm doing is not diversification.

[winston]

If one of my position gets a bit too big, say 10% of my portfolio, I will try to reduce my exposure or I watch it very carefully.

[cif5000]

Thanks guys.

Well, diversification or not, good or bad, that's not point I was raising.

I am actually more interested to get some insights from investors who practice diversification and how they manage that. Someone in this forum, please help? I am stuck...

[Cheng]

Thanks guys.

Well, diversification or not, good or bad, that's not point I was raising.

I am actually more interested to get some insights from investors who practice diversification and how they manage that. Someone in this forum, please help? I am stuck...

cif5000, you know GHChua? Maybe he can provide you with some answers.

http://ghchua.blogspot.com/

[winston]

Hi cif5000,

You may want to also look at the "Risk Management" thread.

It's also no point diversifying into many stocks but find that half of them are in the same industry or are affected by the same factors eg. all small S-Chips dropped on credibility issues etc.

Realistically, one can actively trade at most 5 stocks at any one time.

If one has 20 stocks in the portfolio, probably half of them are "buy & hold" counters where you review them only when there's an announcement or analyst report.

I try to have not more than 20 stocks in my portfolio.

Take care,
Winston

[iam802]

Here's my attempt to answer the question.

For stocks that require more attention, I keep it to 5-7 at any one time.

Why?

Because it is a figure that I can work efficiently.

How else do I make it work more efficiently?

I set stops in all my position. Once it trigger, high chance I will have taken profit or cut-loss. This allows me to sleep early and not have to watch the market all the time.

Having said that, I think the question I will ask is "What is the difference between diversification and Asset Allocation?"

For me, the money I have in my trading account is expected to be invested in stocks or options that requires my attention (unlike a FD, property, or other long term stock position).

Am I answering anything here? Maybe not....

[cif5000]

Good points, taken with thanks.

I have another question.

If we intended on a diversified portfolio. e.g. 7-10 stocks. Do we actively manage to achieve that? What would one do if the number gets too small or too large?

I think Asset Allocation is on the "big picture", the Diversification (with capital D). Zooming in to the stocks level, there is the small d diversification. To reduce risk and improve return. (i.e. want it cheap and fresh)