Diversification

[donmihaihai]

How much time depend on your ability and willingness to spend the time. Actually I think time is not a big factor on diversification unless I don't want to spend lot of time on this. It is always possible that I am holding on to 10 stocks while I have already spend time studied 100 companies. These 100 companies will become important database. Let me qoute WB(not exact words), " 50 years of research, 15 minutes of decision making."

What is your limited? I don't know but If I reached a situation where I think I have too many stocks, I will look back, into my stocks, "Have I made a mistake on this stock or that stock," "Is there any walking dead".

Lastly, capital is not cheap so I usually weight any potential new purchase with old one. Competition for a place in my holding is a must.

[iam802]

Is the number of positions the key concern (5 stock positions vs 7) ? Or is it the expected returns (eg. 30% in 12 months) that is more important?

I think if you can answer that, you will know what to do.

Personally, I focus on expected returns and the timeframe first. Once I decide on it, I go about doing my allocation. And what's left is just risk management.

[donmihaihai]

Just to add on.

In no situation, I would draw a circle and force myself to fit into it. That mean the number of stocks happen naturally not because I want 10 stocks --- more a stock more or less.

[Musicwhiz]

Hi cif5000,

Just my views - I don't believe I can handle more than 10 companies in my portfolio, in terms of time spent analyzing their financials, keeping up with them and reading as much as I can about them. Monitoring just one company alone can be pretty time-consuming, as I've found out the hard way! And maybe that's also because I want to spend time with family, friends, doing other leisurely activities like walking, cycling, shopping etc....so that leaves less time to devote to investing.

I note that your portfolio consists of >30 companies? Just curious as to how much attention do you devote to each, and is it based on the complexity of the business or the weightage of that company relative to your portfolio size (e.g. 10% of your money is in Company A so you spent more time on Company A than other companies within your portfolio?).

Thanks!

[winston]

Some additional comments:-

1) There's an Opportunity Cost. If you spend a lot of time analysing a certain company, that time cant be spent elsewhere eg. looking at 10 other companies

2) I prefer to spend my time on the big picture first. Then zoom into the industry and then only focus on the companies in that industry

3) George Soros supposedly would buy the strongest and the weakest company in an industry that he likes.

4) It depends on your Investment Strategy. If you are a trader, you can only actively trade at most 5 stocks at a time. If you are a "Buy & Hold" type, I think you can have 20 stocks. Anyway, those are my limit on both "Trading" and "Buy & Hold". I do both

[ghchua]

Diversification is to prevent non-systematic risk like company related problems from hitting your portfolio. And therefore, the more you diversified, the chances of non-systematic failures hitting your portfolio hard will be reduced.

No matter how much research that one had done on a company, there is still a chance (no matter how small it is) that it will fail. Therefore, diversification reduces this risk.

Diversification doesn't mean equal allocation in each stock in the portfolio. One can choose to underweight or overweight individual companies in a diversified portfolio.

How I manage my portfolio? Simple. Because a well-diversified portfolio will not be prone to non-systematic risk from hitting it hard, there is no need to monitor any stock in the portfolio closely. Therefore, there is no need for me to take profit or cut loss, since my portfolio is well-diversified. By not taking any profit or cut loss actions, I minimize errors due to wrong judgement of my actions.

I let my winners run and I don't cut my losing stocks.

[millionairemind]

I let my winners run and I don't cut my losing stocks.

Welcome to the forum ghchua

You must be one hell of a good investor, no need to cut loss.

Please do share how you pick your stocks.

[cif5000]

Thanks guys, again (3rd time). I like the diversity of opinions. It has certainly helped.

It'll take some time for me to submit my thesis.

[Rontan]

Hi cif5000,

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.

Winston

I can't agree more with this statment by W. If you buy Singtel, Starthub and M1, there is no diversification since all three comanies operate in the same industry and are exposed to the same risks. The key to diversification is finding uncorrelated assets.

I personally feel that time, capital and knowledge are the three factors that determine how much to diversify.

Time - If you have a lot of time at your disposal, you can afford to screen through a wider range of companies across industries before putting your money down on a few selected gems.

Capital - Obviously, the more money you have, the more stocks you can, and should buy to spread out the risk.

Knowledge - If you process a certain level of investment expertise and are capable of crunching and analysing the numbers, that you should avoid diversifying too much.

Conversely, if you have limited time, capital and knowledge, then buy index fund is safer. If not, stay away from investing (or should I say gambling in this case?).

To quote WB, he says that a six stocks portfolio provides sufficient diversification if you know what you are doing.

[iam802]

To quote WB, he says that a six stocks portfolio provides sufficient diversification if you know what you are doing.

I believe CANSlim preaches this as well (MM will be the one to verify with)

And with CANSlim, the theory is to go with the leaders of the group (or sectors). (<< ok, digressing from diversification)