How much to diversify

Most financial advisors will recommend that investors diversify for their own protection. What they neglect to mention, however, is that this advice is also for the protection of the advisor him/herself.

No doubt, for someone new to the world of investing (or with a relatively small portfolio), a “broad based ETF or combo of ETFs may be a good idea.” And certainly no one should be foolish enough to put all their eggs in one basket by holding only one stock.

At the same time (as this advisory puts it), “if you want to beat the market, you cannot be the market.” An investor should be aligned with modern portfolio theory, which holds that you are nearing “optimal diversity” around the time you add the 20th stock to your portfolio.

The problem today, however, is that many funds and sundry investment products hold somewhere between 50 to 300 stocks – but only create “well below average” returns for their clients’ portfolios over time. Why? Because, in the words of Warren Buffett, “Wide diversification is only required when investors do not understand what they are doing.” And the Oracle of Omaha practices what he preaches; his top 5 holdings, on average, comprise 73 per cent of his portfolio.

With that in mind, says this advisory, follow a strategy of “focussed diversification” in your portfolio’s small-cap growth segment. First, purchase 10-12 small cap stocks, which should initially be equally weighted. To avoid buying at a market peak within a year or cycle, build your portfolio over at least a year. And buy companies from a diverse set of industries. Then review and pay careful attention to updates and research on your stocks to help guide your investment decisions (advisories like this one can provide both a recommended list of stocks and updated information).

 

 

 

Keystone’s Small-Cap Stock Report
555-15216 North Bluff Road, White Rock, BC, V4B OA7
(888)-277-8625, www.keystocks.com, $299 a year.

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