Great article on the value of not over-diversifying if you know what you are doing. Many legendary investors, like Bill Ackman and Michael Burry, think similarly.
Good article but a bad assumption that all 50 stocks are equal weighted when you say one stock gaining would only increase the portfolio by 2%. A lot of people (including me) weigh more in certain stocks based on higher conviction and small positions in others.
Exactly. Your higher-conviction stocks should be heavily stacked against the 'high risk, high reward' types getting a low %. So, not just the number of stocks, I think, PF allocation % is the key. Thanks for the article.
Great reminder! For most portfolios, 10-20 stocks is likely to offer sufficient diversification to guard against unsystematic risk without too excessive dilution.
Few professional investors aspire to be a mediocre closet indexers/benchmark huggers, but unless you're a hedge fund or private investor, there are regulatory maximum position hurdles: The 40 Act in the US says that 75% of assets must be in a diversified portfolio, with no more than 5% in any single stock, and the remaining 25% allowed to be invested more freely. So the lowest theoretical number of stocks would be (75% / 5 = 16 +1 (at the 25% max) = 17. UCITS in Europe is more lenient, requiring 60% of the fund to be diversified with no more than 10% positions, and the remaining 40% invested more freely. So ((40% / 1) = 40) + (60% / 10) = 7.
Most internal guidelines are tighter than that, and a 40% single-stock position would be laughed out of the room by most institutional investment committees. 10% max is more like it (mirroring the weights Microsoft and other mega-cap techs have in some indices), so the realistic bare minimum number for a concentrated mutual fund is 20 in the US and 11 for Europe . Then there's the practical reality of having to run a circa 5% cash cushion to deal with redemptions ... and the likelihood of redemptions resulting from the volatility of a X stock portfolio is very high indeed. At the big fund house I worked in Germany, an "unconstrained/concentrated/high-octane" portfolio was 30-25 stocks, and a mainstream fund fund closer to 50-40.
Also, there is also the very real desire for people with mortgages and kids to put through school to not want to sail *too* far out on the efficient frontier https://en.wikipedia.org/wiki/Efficient_frontier . Just try to explain to distributors or investors that a highly-concentrated portfolio which has underperformed for three years on the trot has a very high statistical probability of outperforming in year four ... you'll hear some non-career-enhancing crickets chirping.
I'd say up to 20 stocks is ok to follow. Especially, if you have enough time. It also depends on the type of investments.
Interesting link, where you can read what different famous investors think about certain topics, in this case diversification: https://mastersinvest.com/diversificationquotes
Hi
Great reminder
Thanks Joel!
Awesome post, Schwar!
Excellent reminder for focus and concentration. I have this to be true over my 15 years of investing in the market.
Cheers - appreciate it!
Great read!
Thanks!
Great article on the value of not over-diversifying if you know what you are doing. Many legendary investors, like Bill Ackman and Michael Burry, think similarly.
🙏
Good stuff
Good article but a bad assumption that all 50 stocks are equal weighted when you say one stock gaining would only increase the portfolio by 2%. A lot of people (including me) weigh more in certain stocks based on higher conviction and small positions in others.
Exactly. Your higher-conviction stocks should be heavily stacked against the 'high risk, high reward' types getting a low %. So, not just the number of stocks, I think, PF allocation % is the key. Thanks for the article.
Great reminder! For most portfolios, 10-20 stocks is likely to offer sufficient diversification to guard against unsystematic risk without too excessive dilution.
Few professional investors aspire to be a mediocre closet indexers/benchmark huggers, but unless you're a hedge fund or private investor, there are regulatory maximum position hurdles: The 40 Act in the US says that 75% of assets must be in a diversified portfolio, with no more than 5% in any single stock, and the remaining 25% allowed to be invested more freely. So the lowest theoretical number of stocks would be (75% / 5 = 16 +1 (at the 25% max) = 17. UCITS in Europe is more lenient, requiring 60% of the fund to be diversified with no more than 10% positions, and the remaining 40% invested more freely. So ((40% / 1) = 40) + (60% / 10) = 7.
Most internal guidelines are tighter than that, and a 40% single-stock position would be laughed out of the room by most institutional investment committees. 10% max is more like it (mirroring the weights Microsoft and other mega-cap techs have in some indices), so the realistic bare minimum number for a concentrated mutual fund is 20 in the US and 11 for Europe . Then there's the practical reality of having to run a circa 5% cash cushion to deal with redemptions ... and the likelihood of redemptions resulting from the volatility of a X stock portfolio is very high indeed. At the big fund house I worked in Germany, an "unconstrained/concentrated/high-octane" portfolio was 30-25 stocks, and a mainstream fund fund closer to 50-40.
Also, there is also the very real desire for people with mortgages and kids to put through school to not want to sail *too* far out on the efficient frontier https://en.wikipedia.org/wiki/Efficient_frontier . Just try to explain to distributors or investors that a highly-concentrated portfolio which has underperformed for three years on the trot has a very high statistical probability of outperforming in year four ... you'll hear some non-career-enhancing crickets chirping.