There was an interesting article in this week’s Investors Chronicle by John Rosier which discussed the number of holdings he had in his portfolio. He had attended a presentation by a well-known private investor who had 25% of his portfolio in one stock. John questioned whether he held too many stocks in his own portfolio (32 according to his portfolio list). He mused that Neil Woodford held 135 stocks in his UK Equity Income Fund but the largest 10 positions made up 42% by value. Mark Slater who runs the MFM Slater Growth Fund also had 42% in his top 10 but Nick Train in his Finsbury Growth & Income Trust has 75% in his top 10.
Now this caused me to examine my own portfolio. I actually have 95 equity holdings, and at this point in time, no bonds or other fixed interest stocks. The figures for my portfolio are:
37% in the top 10.
60% in the top 20.
85% in the top 50.
So it’s moderately concentrated and only slightly less concentrated than those mentioned above apart from Nick Train’s. As John Rosier said in his article, the concentration of the portfolio in the largest holdings is more important than the total number of holdings.
One interesting aspect is that this concentration is not just from design. It has arisen because I tend to buy more of the winners and sell the losers. Indeed, it would have become even more concentrated but I have a rule that I do not like to have any holding go over 5% of the total. That limit is even lower for smaller cap stocks because they are obviously more risky and my innate conservatism leads me to prefer to avoid large shocks to my overall wealth.
If I was younger, and not solely depending on my investments to finance my living standard then I might be able to take a more aggressive stance. Indeed, at my age (71), most financial advisors would say I should have well over 50% in fixed interest but I have taken a different view as to what is safe and what is not. More diversification, particularly across many small cap stocks with many on good dividend yields backed up by cash (ignored in the above calculations), gives me some protection. In addition with some smaller AIM stocks, it can be very difficult to buy or sell large blocks of shares so getting out when you want to can be very difficult if you have a big stake. So investors who hold AIM shares are probably sensible to have more shares in their portfolios than those who concentrate on FTSE shares alone.
Perhaps the issue with my portfolio is that there are 45 stocks I hold that make up only 15% of the overall portfolio value. Why bother with them? Some of these are ones where I am building up a holding from an initial low level, and some are simply small cap speculations where I am still learning about them. A few are VCTs that I bought years ago and find it difficult to dispose of without incurring capital gains tax. Others are holdings not in my ISA and SIPP accounts where disposing of them altogether would crystalise a capital gains tax liability when I am already over the annual allowance. There are a few “duds” where the holding shrank to a very small size as I gradually sold it down as a result of following the share price trend.
The key to managing the 95 holdings is to use some automated software tools to track one’s portfolio and the individual holdings to ensure you don’t miss any share price break-outs (up or down) or any news – I use several such products and services.
Having pondered this question of “how many stocks”, I am not uncomfortable with the current structure of my portfolio but it’s probably worth doing this exercise regularly and clearing out some of the smaller holdings once per year.
Another aspect to consider is of course how diverse the holdings are in terms of them operating in different market segments – to avoid the problem of them all moving together. It is very obvious from studying the reader portfolios regularly published by Investors Chronicle that many private investors have too many holdings – typically multiple funds that are likely to move in step.
I hope this article has prompted readers to look at their own portfolios and the concentration they have in them.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Interesting article Roger.
“I have a rule that I do not like to have any holding go over 5% of the total” – I have a similar rule set at 6%. I think Richard Beddard uses 10%, but that’s too much in one stock for me. It might interfere with my sleep.
Your portfolio analysis prompted a quick one of my own:
Top 10 = 44%
Biggest position = 5.2% (Victrex)
Smallest position = 0.9% (Petrofac)
So very similar to yourself, Woodford and Slater. I think most reasonably experienced investors would fall into this ballpark, with major holding tending to be around 3% to 5%.
I know lots of investors like to hold more of their favourite stocks, but I just aim for equal sizes across the board. Any differences in size (e.g. Victrex and Petrofac above) is purely down to share price movements.
Good post as usual Roger. Just one query:
“A few are VCTs that I bought years ago and find it difficult to dispose of without incurring capital gains tax.”
Are VCTs not exempt from CGT?
In answer to Steve, in the early days of VCTs one could claim capital gains roll-over relief on your investment, and if you sell them you get the capital gains rolled back in. But otherwise capital gains/osses within the VCT are not taxable.
IMO the answer to the question “How many stocks?” is very much driven by personal circumstances, psychology and experience.
My own experience, over 13 years of investing full-time, was that some of my “highest conviction” holdings turned out to be duds and, conversely some of my smaller holdings that I considered speculative/risky made the largest gains! The reason for some high conviction holdings failing was that even though I thought I understood the business well, suddenly something unexpected came out of left field, damaging the investment case.
I concluded that my own ability to assess ALL the risks in any investment was limited and, similar to Roger, imposed a limit of around 5% in any one company as a “comfort level”. I currently only have 27% of my invested portfolio in my top 10, with my largest (Endeavour Mining*) being 3.8%.
ISTM that at present the market is presenting some very frothy valuations for go-go stocks, which has caused me to trim some previously large holdings (e.g. Keywords Studios – wonderful business, IMO, but just too expensive). That means that even less than usual is concentrated in my top 10 currently. I don’t want to be the one hunting for a chair when the music stops!
*It may seem rather strange that a Canadian listed West African gold miner is the largest holding of a reasonably risk-averse investor like me! However, this is largely a product of history, when the company’s shares gained very strongly in 2016. I have already top-sliced that holding significantly, so have received most of my original investment back. I am comfortable with what remains, as part of my hedging strategy against geopolitical risk, by being a geared play on the gold price (as well as exposure to significant production growth underway in the business). By contrast, my 2nd largest (3.2%), HVPE, is a phenomenally diverse private equity investment trust (over 6,000 underlying holdings!)
Good article which raises some very important points for investors.
There is no right answer to this question as it’s largely down to personal preferences and attitudes to risk. It’s perfectly fine to own lots of shares if that makes you feel more comfortable and sleep better at night (but it will probably dilute your returns). The same goes for having a concentrated, high conviction portfolio with fewer shares. For me, It is what’s in your portfolio that matters rather than how many shares you have.
Concentrated investing does suit the private investor who may have other things to do in their lives but it is no guarantee of success.You can have a very concentrated portfolio but if it is allocated to bad stocks that concentration is going to work against you rather than for you.
My portfolio currently has 25 shares which is enough to keep me busy monitoring and understanding them. My biggest holding is 8% and smallest is 2%. My top 10 holdings make up 50% of my portfolio.
I would certainly agree that for most private investors a target of 25 stocks would be better than my 95. That’s certainly the case if you are fully employed or have other business commitments and the smallest 45 in my portfolio clearly make little contribution to the overall portfolio performance (bad or good – but most of them also get little attention so don’t consume much of my time).
I do think that experience does enable you to cope with more stocks though – you learn what is the important information to pay attention to, and what “noise” in the market to ignore.
I aim to have my portfolio in around 6. I add to my winners on the way up (early in the trend) so basically my biggest position will be in my best winners and this also gives a % cushion when that bad news finally comes around. A gap down on bad news still pays many multiples more than scaling back on the way up and having less money in my best performing ideas. Maximum I hold is usually about 14 but I weed out the laggards and build into the leaders. I limit heat on account to a maximum of 10% using stops but can keep this within 6% quite easily. This method keeps my risk very low as I can only build on success. I need to be trailing heat out of the market with sensible stops to add more risk. The downside of trading for big winners is the increased volatility in open profits and the psychological problems that go with it. I don’t like to think of paper profits as risk. I’m more concerned with having large positions with gap risk (no % cushion before adding) I do the exact opposite of averaging down. More volatility in my winners with a % cushion if a price shock occurs.
I think it also depends on the total size of the portfolio, how it compares to other assets you may have, how old you are and what your general life situation is. If you’re young and your portfolio is worth £20k it may well make sense to have aggressive positions in a few small companies. In my own case I’m retired and generate 2/3 of my income from investments so I’m not prepared to take substantial risks – Provident Financial today is a good illustration of what can happen, it seems there were several brokers with price targets over £30. I don’t hold it myself but I don’t have any reason to think I’d have any more insight than those brokers. My target allocation to any individual share is about 1.25% of the portfolio, and if it gets more than a factor 2 away from that I’ll start thinking about adjusting it, and definitely before it got to a factor 3 away.