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 )