Tag: stock portfolio

  • Concentrated Stock Portfolios – Are They Risky?

    Concentrated Stock Portfolios – Are They Risky?

    Concentrated Stock Portfolios - Are They Risky?
    A portfolio of fewer than 10 stocks can be more volatile than a portfolio of 200 stocks and riskier. But it is able to produce greater wealth.

    Concentrated stock portfolios are portfolios that hold a small number of different stocks. The aim is to reach a specific level of diversification. But it is different from diversified portfolios because concentrated stock portfolios can consist of less than 10 stocks. This kind of portfolio can increase the risks but at the same time, it increases potential gains. While we are broadly talking about the importance of portfolio diversification concentrated portfolios actually generate the highest returns. And if you examine the results of both, you’ll see that concentrated portfolios that include only a few stocks are better solutions for creating huge wealth. 

    How is that possible?

    Concentrated portfolios also allow investors to be focused on a small number of investments but high-quality. Many famous and extremely successful investors made fortunes with concentrated stock portfolios. 

    We don’t want to neglect the importance of diversification. It’s the opposite. Diversification is by far the most important lesson that we can learn. Also, the importance of spreading money across different stocks and sectors isn’t doubtful and will significantly reduce risk. But a lot of investors don’t follow that advice and are growing their wealth as a result. Warren Buffett once said “diversification is a protection against ignorance” and what is interesting, data shows that concentrated stock portfolios generate more profits. Simply, they are better performers. 

    Disadvantages of diversification

    Diversification has benefits but you’ll need a balance between risk-controls and returns. This highlights investors that diversify across concentrated stock portfolios rather than diversified. Diversified portfolios have a lot of market risk, anyone can confirm. 

    But, how much is proper?

    All investors are faced with this question and it isn’t a simple one. If you have a concentrated stock portfolio you may experience the stressful event if you don’t understand the company you are investing in completely. However, if you are ready to explore and spend time to get to grasp the companies you want to buy, the concentrated stock portfolio might be a great choice and it can generate high returns.

    But be careful, invest only in the companies that you believe you have an advantage. Concentrated stock portfolios aren’t necessarily risky but only if you are ready to work more. This means you have to be responsible for your investments and never neglect the dangers that may appear. You have to pay a lot of attention and spend time to be able to reduce the risk if you want to build a concentrated stock portfolio.

    Diversified portfolios hold stocks of numerous companies. 

    It is between 40-75 stocks. Concentrated stock portfolios hold less than 25, and it is common to hold less than 10. For example, the structure of such portfolios means that you have 5 to 10 stocks which constitute over 50% of your overall investments. It is important to follow this structure because if you don’t follow these percentages and your portfolio holds under 40%, your portfolio will be diffused.

    Diversification has some advantages. It can reduce the level of portfolio volatility and potential risk. When investments in one sector perform inadequately, other investments will offset losses. But you have to hold assets that are negatively correlated. 

    But diversification can have negative effects on your portfolio. That is a great disadvantage. A diversified portfolio can limit your potential gains and produce average returns. For example, you hold a few winning stocks but beside them, you hold 20 stocks with poor performances and they will reduce your overall gains.

    Also, diversification requires to rebalance your portfolio. If you created a widely diversified portfolio you’ll have a problem monitoring and adjusting your investments. And if you don’t pay sufficient attention the risk may increase.

    The benefits of a concentrated stock portfolios

    Conventional thinking states that diversification reduces the overall risk of investing in stocks. And what is interesting, investors support that approach but, for some reason, avoid concentrated stock portfolios as too risky. It is understandable, but having too much can be bad.

    But not all investors are opponents to concentrated stock portfolios. For example, Warren Buffet who advocates for a concentrated portfolio suggests: ‘‘An investor should act as though he had a lifetime decision card with 20 punches on it. With every investment decision, his card is punched, and he has one fewer available for the rest of his life.’’

    How to build concentrated stock portfolios

    It isn’t as hard as you may think. For example, buy stocks of companies you know well, stay focused on your main investment purpose, invest for long-term to gain the benefit of compounding. And, what is most important, research a lot to find the best stock to invest in.

    When you invest in a limited number of companies you actually have a great opportunity to invest in high-quality companies. There is no need to compromise on quality. What you have to pay attention to? Be informed and buy the stock when it is priced below its worth when the market undervalues it. This gap will provide you significant and profitable upward potential. 

    Legendary John Maynard Keynes suggested investors hold concentrated investment portfolios. In 1938 he wrote:

    1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time;
    2. A steadfast holding of these in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake;
    3. A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.”

    The ideas for concentrated stock portfolios

    Let’s examine two possible portfolios and compare them.

    The first one consists of all stocks in the market. You can hold such a portfolio without a problem if you use mutual funds and index-tracking investment trusts, for example. If we ignore all fees, the return of this portfolio will be an exact match of overall market returns.

    The second is a concentrated stock portfolio with one single stock. Let’s assume that stock is a great player, so its return could beat the market. Of course, if the investor made a bad pick the total loss is guaranteed.

    So where is the point of holding concentrated stock portfolios? 

    If you have a smaller stock portfolio, the possibility to have a higher return than the market average is greater. If you want to hold a smaller portfolio everything depends on your ability to identify all details of some company, you have enough time to find some low-priced stock that can outperform the market greatly. A careful selection of stocks will maximize your long-term returns. 

    But the concentrated portfolio should be balanced 

    Concentrated stock portfolios hold several stocks and as being such, are resistant to the risk of a total loss. Even if the value of a single holding falls to zero. It is possible if every stock from the portfolio performed the same. So, you should hold stocks with incompatible risks or opposed risks. For example, you could reduce the risk if you invest in some hedge funds.

    Bottom line

    No risks, no rewards is the most meaningful sentence in investing.

    When you know all the company’s details, that allows you to decide which investment concept has the highest profit potential. If you want your capital to put to work, your investments should be your top choices. Of course, you have to be selective. No one has hundreds of top choices.

    Try to think of a small portfolio with several stocks like this: a small portfolio can increase risks, but it will also maximize the returns with a few outstanding players. Always keep in mind the investors in Microsoft. Why should any of them want to hold any other stock?

  • A Diversified Stock Portfolio – How to create?

    A Diversified Stock Portfolio – How to create?

    How to create a diversified stock portfolio 1Building a diversified stock portfolio is just the beginning but an important part of investing. Here is how to do that.

    By Guy Avtalyon

    We already mentioned a diversified stock portfolio.

    ‘Don’t put all your eggs in the same basket’ is probably the most popular saying telling investors about the importance of portfolio diversification. Otherwise, how to spread and reduce risk? 

    The major advantage of the diversified stock portfolio is its ability to protect your entire portfolio from the volatility associated with different asset classes.

    In this article, we look at ways to protect your portfolio by spreading your risk across several different asset classes. Also, some of the many different assets in which you can invest, each with different risk characteristics.

    Where is the advantage of the diversified stock portfolio?

    The risks attributable to assets cannot be avoided. But when they are managed as part of a diversified portfolio, they can be reduced. Individual assets have a bearing on the overall level of risk you are exposed to.

    And the association between the assets has even greater importance. This article considers how a well-constructed investment portfolio should be diversified in a variety of ways. Including overall investment style, a number of individual asset classes, the spread of geographical allocation, and the approach of the fund manager.
    The key is to build a  diversified stock portfolio with a mix of different investments that make sense for your attitude to risk.

    A balanced investment portfolio should hold a mix of equities: stocks, bonds, property, and cash.

    Yes, we know. For some of you, the world of investing is complicated. There are mutual funds, exchange-traded funds, target-date funds, a variety of bonds and fixed-income products and then, of course, individual stocks.

    These days more and more investors are turning to low-cost ETFs. And necessary, there is the question: is it worth taking the time to build an individual stock portfolio? Yes, it is.

    But you have to put in some time and research.

    There are various advantages to individual stock ownership.

    We believe an individual investor has an advantage over professional investors. But only if you are willing to do the homework necessary to understand the company, management, and the industry underlying each individual stock.

    How can you start picking the companies that go into their stock portfolio? Building a solid stock portfolio requires some time, research, and homework.

    What is a well-diversified stock portfolio

    The diversified stock portfolio should have 10 to 30 individual stocks.

    There are 10 stock sectors classified by S&P Dow Jones Indices. These include energy, materials, industrials, consumer discretionary, consumer staples. Also, health care, financials, information technology, telecommunication services, and utilities.

    A general rule is to own two to three of the top companies in each main sector.

    Stock rankings, screeners, and lists can help individual investors in their quest to find the best stocks for their needs. The rankings can slice and dice stock market members up by returns, market capitalization, dividend yield, price-to-earnings ratio, and other criteria.

    Investing in research doesn’t have to be for professional portfolio managers. It is for individual investors too.

    How to diversify a portfolio between growth and value stocks?

    Or between dividend stocks and those focused on plowing their profits back into their operations.

    Diversification is a beautiful thing because it can lower risk without lowering the expected return of a portfolio. This is more or less related to magic by Wall Street standards. Use your research and logic to weed out the stocks that you do not like. Or the companies that have historically lost money due to the competitive pressures.

    It will be good for you to understand the behavioral psychology and economics at play behind the companies you hold in your portfolio.

    For example, knowing the demand elasticity, or how much a change in price will impact the quantity demanded, can be useful in understanding a company or industry’s prospects.

    If the price of gas went up 15% tomorrow, it’s very unlikely there would be a corresponding drop in demand. People need to drive, of course.

    How to establish an investment time frame in your diversified stock portfolio?

    Since you are going to own individual stocks you need at least three to five years. The longer the better. In order to reduce certain volatility.

     

    Hence, to be successful in individual stock investing, you must do your homework. But more importantly, you need to have a steady temperament and be confident in your own convictions and analyses.

    Building your diversified stock portfolio may be just the beginning. But, for the interested and dedicated investor, the payoffs could be well worth the work.

    Picking good stocks requires research, time, and the ability to evaluate many parameters for the stock, industry, and overall economy.

    And while buying a few dividend stocks should earn you some healthy interest income. Your real dividends will be the long-term gains you rack up as you watch your picks grow.

  • How to structure your stock portfolio?

    How to structure your stock portfolio?

    How to structure your stock portfolio? 1The structure of the investment portfolio depends on many factors but risk appetite is maybe the most influential one.

    By Guy Avtalyon

    How to structure your stock portfolio? The answer to that question depends on your attitude to risk. Here are three sample portfolios.

    What is the best structure of a portfolio?

    Laith Khalaf, a senior analyst at UK wealth adviser Hargreaves Lansdown suggests this model of your stock portfolio structure:

    Adventurous investor
    20%: JPM Emerging Markets
    20%: Legal & General International Index
    20%: Man GLG Japan CoreAlpha
    20%: Threadneedle European Select
    20%: Standard Life Global Smaller Companies

    Balanced investor:
    20%: Invesco Perpetual Tactical Bond
    25%: Newton Global Income
    10%: Stewart Investors Asia Pacific Leaders
    25%: Legal & General UK Index
    20%: Baillie Gifford Managed

    Conservative investor:
    25%: Newton Real Return
    20%: Investor Perpetual Tactical Bond
    10%: Legal & General Global Inflation-Linked Bond
    20%: Threadneedle Equity Income
    25%: Troy Trojan

    How you will structure your portfolio depends on are you a defensive, middle-of-the-road, or aggressive investor. This will partly determine where you invest.

    What is a portfolio structure? 

    The portfolio construction is the process of organizing your investments as a whole, rather than piecemeal.

    How can you have the best chance of constructing a portfolio that meets your investment goals?

    At a broader level, portfolio construction should be about structuring your portfolio in a way that stands the best chance of meeting you have stated investment aims within your acceptable level of risk.

    But be careful, well thought out structuring of your assets will have an enormous impact on your long-term wealth creation. Conversely, the wrong structure could cost you in both ongoing charges or unexpected tax liability.

    What factors do you have to consider in deciding on the combination of stocks, bonds, and perhaps commodities to use in building up your retirement portfolio?

    Let’s say that the further one is from retirement, the more risk one can take. Thus at 30, you might have a portfolio of 70% stocks, and 30% bonds. At 50, the ratio might be half stocks and half bonds and at 70, 70% bonds and 30% stocks.

    This model of stock portfolio structure allows for a more predictable and more stable income from bonds. But it does not take into account the characteristics of the individual or the nature of the stocks and bonds. Moreover, not all stocks are equal.

    Structure of the stock portfolio based on risk tolerance

    Find how the structure of the stock portfolio matches your risk tolerance.

    If your stock portfolio at 30 or 50 is loaded with, for example, half small caps with no dividends, mining stocks with low dividends then the need for bonds is higher. Or if the bond portion of a portfolio is loaded with high-yield bonds subordinated debt, the fixed-income portfolio needs to be rebuilt for security.

    As we move from working years during which it is possible to raise savings and make up for investment losses into retirement, the need to cut volatility grows. A mixture of short and long government bonds and corporate bonds can’t compete with the potential of small companies’ stocks to rise. But it does have fundamental security.

    But you can implement some other model of structuring your portfolio. For example, you can buy stocks from developed and emerging markets around the world. And you can own real estate through a low-fee fund as a part of your portfolio.

    If you live in the USA, Treasury inflation-protected securities, or TIPS are a very good choice. Some of these parts will possibly increase and drop and increase again. It will happen at different times and at different rates. So you can rebalance at least once a year to maintain your target allocation in your portfolio.

    David Swensen, chief investment officer, Yale University suggests this, take a look at the image below.

    How to structure your stock portfolio? 2

    How do the fees influence the structure of the stock portfolio

    Fees can make terrible damage to your investment returns.

    Even if you hold the higher-risk, but also, higher-return asset classes. In case of, for example, stocks, you can expect high but one-digit or low double-digit returns over a long time. In fact, Swensen said you can end up losing more than half of your returns. The math is simple, you’ll have to pay 1% for your financial advisor, the additional costs are mutual funds fees which are approximately 1-2%. Finally, you’ll have to adjust your returns for the percentage of inflation.

    The odds, he said, are in favor of index funds. In his opinion, very-low-fee index funds make the most sense for individual investors.

    When it comes to investing there is no such thing as one size fits all.

    Speaking about how to structure your stock portfolio, your portfolio has to be well-diversified, equity-oriented for long-term investors, and efficient in the sense that it is as good or better than other alternatives.

    Portfolio structure depends on how long you want to stay invested 

    When you’re investing for the long run, for example, 20 or 30 years, you are expected to make more money holding a fairly large part of your portfolio in stocks or some other assets that have a high rate of return. That’s because historically, stocks offer greater returns than safer alternatives over the long term.

    But in the short term, stocks tend to be much more volatile. So as you approach retirement age, investment advisers suggest moving more assets to the “safer than stocks” class.

    Let’s say the stock market crashes and you need to spend money out of your portfolio as income in retirement. So, you don’t want to lose 20 – 30% of your savings and to sell your stocks at a lower price. If you’re younger and market crash, you can just stay invested and wait for the market to recover.

    But it isn’t all about age

    How to structure your stock portfolio is also about the appetite for risk. Risk tolerance is different for each investor. Risk-averse investors will prefer to hold a mixture of the stock portfolio and cash. Cash could reduce overall risk. When wealth increases, it could happen a tolerance for risk to increase also. But when you grow older, tolerance for risk could decrease. Each investor needs to find his/her own stock portfolio structure that suits their risk tolerance. That’s the main point.