Research confirms investment counts matter with 16 diversified stocks in superior portfolios holding 5% to 7% in each delivers the greatest performance impact.
Wealth Building Portfolio Management, Lesson 6, gives investors a clear guideline on the number of holdings needed for investment portfolios. Links at the end guide you to related content if you want to learn more.
What’s in this lesson for me?
This lesson helps you build a superior performing portfolio. By following the lesson guidelines you can build an investment portfolio that properly meets diversification needs with a reasonable number of different shares that have the potential for high impact returns.
The academic answer to holding counts
Multiple academic studies conclude that a fairly narrow range of positions perform best. That allows you to meet the need for portfolio diversification. It also ensures that each position is large enough to impact the portfolio performance.
Most academic studies suggest between 15 and 20 stocks as the best number. You and your top research assistant, Google, can find endless numbers of studies. Those studies also suggest a broad range of ideal strategies. You can get blurry eyed reading such studies, if you wish. Don’t bother.
Before adopting academic conclusions in your investing plan, wait until you meet the professor who has achieved wealth by following their academic discoveries. There are many excellent and useful studies. They help us understand. But few are well adapted to producing superior results in the real world. That is worth repeating. Few academics invest well.
The studies are academically and mathematically correct. Still they all have a huge flaw. They ignore investor psychology, which always matters. Psychology is a huge factor in the market and in investing success. Too often it is ignored or neutralized in academic studies.
In my view that serious flaw renders these studies unrealistic and of limited value. I think the market is one place where reality and practice routinely outperform such studies. No idealistic theory, that artificially limits the many factors involved, can give realistic and applicable answers.
In the real world, investor psychology ranks far above the facts, particularly in short-term market behavior.
Holding 15 to 30 max
You have to feel right about how many stocks you hold in your portfolio. At times I have held over 40 positions but routinely hold less than 20. I now believe 30 stocks is the absolute upper limit and fewer excellent positions produce significantly better results. 16 or perhaps 20 stocks is a better, and more manageable, upper guideline.
Holding significantly above 20 stocks quickly presents a management challenge. Be mindful that you will be very busy on the release of 20 quarterly reports! Which do you read first?
Reviewing 20 or 30 reports will remind you of a high school cramming session for multiple exams. That is not advisable. To invest well you need to know each stock well. Remember, we are also considering the need to be diversified. Diversification for risk management means that we can not cluster our holdings in a handful of sectors.
Truly understanding and staying current with larger numbers of stocks can be very difficult. I am presuming you are not doing this as full-time work.
Yes there is an exception
There is an exception. A speculative strategy of bottom fishing, especially in resource stocks, can produce stunning returns. Using that speculative strategy demands serious homework, but it does work. I have profited over many years using that approach. Other lessons will cover speculations in resources, junior start-up and technology stocks. These are strategies for intermediate or advanced investors, not beginners.
For now I will explain it as buying multiple and even several dozen small stocks. The expectation being that some will substantially gain in share price over a limited number of months. It is a high risk, high reward specialty play that can win for those that do their homework. It is not something to dabble in or for triflers.
Concluding there is more to come
First build the income base of your portfolio. As you begin, start by establishing large enough share positions to have a meaningful income stream from dividend payments. Begin buying round lots of 100 shares of a quality stock to build each position.
Be patient. Build them one at a time until you have 5 holdings. Build each of those holdings up until they produce enough dividend revenue to buy another round lot of that stock. That puts you in a critical and very positive position. Your dividend revenue stream now supports the purchase and growth of that stock position.
Do that for each of your first five positions. Then add a sixth. Repeat the process, next adding a seventh and so on. Carry on until you have 16 positions in your growing wealth producing portfolio. Build them up until you have 16 stocks growing your wealth.
Then you can consider the next stage of your pyramid portfolio growth which is beyond this lesson. Before we turn our attention there, we consider the position size lesson.
Why this lesson matters
Without the portfolio discipline of limiting holding counts, investors can get into money losing traps holding dead stocks. Dead stocks take away from portfolio performance by not paying dividends or rising in value. The lesson guidelines keeps us focused on beginning with only dividend paying stocks to avoid the dead stock problem. Building up to 16 or so holdings, we have large enough positions to have an effect on portfolio performance and put far more money into our pockets.
This lesson helps you build a superior performing portfolio. Lesson guidelines focus on building with dividend paying stocks to avoid holding any dead non-producing assets. Building a portfolio of, give or take, 16 holding positions can produce good portfolio performance with reasonable diversification opportunities. That puts more money into our pockets.
Key points to takeaway from lesson 6, Research confirms investment counts matter, includes:
Research confirms investment counts matter with 16 diversified stocks typical in superior portfolios, holding 5% to 7% in each, delivers the greatest performance impact.
- 15 to 30 positions can be held in a well performing portfolio.
- Investors hold approximately the same amount in each position.
- Junior resource stock speculation can justify holding more positions.
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Wealth Building Portfolio Management lessons:
Introduction to portfolio management Lesson 1
Pyramid portfolio wealth building Lesson 2
How investors buy dips Lesson 3
Distracted investing misses profits Lesson 4
Investors never average down Lesson 5
Market patterns repeat repeat repeat Lesson 6
Research confirms investment counts matter Lesson 7
Portfolio measurements to size positions Lesson 8
Growth protects investing profits Lesson 9
Winston Churchill said crisis = opportunity Lesson 10
Weeding your investment portfolio Lesson 11
Next lesson 8:
Portfolio measurements to size positions
Have a prosperous investor day!
Bryan
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