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.