How Many Stocks In A Portfolio?

Discuss your favourite picks, broker, and trading or investment style.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: How Many Stocks In A Portfolio?

Post by AltaRed »

I believe Park was using an extreme example just to put costs into perspective. I can't imagine anyone having 100% churn, except traders and they don't have $10 trades, i.e. they'd be at IB or similar.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: How Many Stocks In A Portfolio?

Post by kcowan »

I may have misled. When I said backfill maturing fixed income, I only included those that were replaced with equity buys.
For the fun of it...Keith
User avatar
deaddog
Veteran Contributor
Veteran Contributor
Posts: 3422
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: How Many Stocks In A Portfolio?

Post by deaddog »

The number of stocks one holds in their portfolio is a personal choice.

I do a lot of back testing of different strategies. Where my back tests differ from most is that I am able to add in criteria for an exit strategy. Stocks are not held in the portfolio for a specific time period but are changed out if they do not continue to meet the entry criteria.

What I have found is that the optimum number of stocks to hold is 7 to 10. Any less and drawdown becomes a problem, any more and returns are affected.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
Park
Veteran Contributor
Veteran Contributor
Posts: 1724
Joined: 13 Aug 2010 20:51

Re: How Many Stocks In A Portfolio?

Post by Park »

The following is more about turnover, rather than the number of stocks in a portfolio.

There are good reasons to have low portfolio turnover. Number one, it takes less time. Secondly, there are lower costs (less commissions, less bid ask spreads to pay and less market impact). Finally, less turnover means more cap gains deferral.

However, there can be reasons for higher turnover. Some strategies, such as momentum, do better with higher turnover. There are some tax planning strategies associated with high turnover. You can more readily apply cap losses against cap gains. You can time purchases and sales to minimize or maximize dividends.

As mentioned previously, less turnover means more cap gains deferral. More cap gains deferral should mean less tax. But unfortunately, it's not as simple as that. Some cap gains will be due to inflation, so you end up paying tax on money you never made. The higher the inflation rate, the more you are penalized through taxation.

From 1914-present, the average US inflation rate has been 3.3%.

The following is from Stocks for the Long Run, p. 138.

The effect of inflation varies with holding period (turnover). With a 3.3% inflation rate under 2013 tax law, the following approximate real after tax returns are taken from the chart:

20 year holding period (5% turnover): 5.4%
10 year holding period (10% turnover): 5.1%
5 year holding period (20% turnover): 4.8%
1 year holding period (100% turnover): 4.6%

In this analysis, the advantage of low turnover isn't that great. Once you're past a 20% turnover, it's small.

With an inflation rate lower than 3.3%, and such a lower inflation rate has been the reality in the US for the last 25 years, the differences in holding period returns would have been smaller.

This is based on historical returns in the USA. Does it apply to Canada? That's a good question. But it raises the point that the tax efficiency of low turnover may not be as great as one thinks.
Park
Veteran Contributor
Veteran Contributor
Posts: 1724
Joined: 13 Aug 2010 20:51

Re: How Many Stocks In A Portfolio?

Post by Park »

This is more about weighting in an individual stock portfolio. I've felt that equal weighting in a portfolio has an inherent tilt to small and value. But equal weighting, if combined with annual rebalancing, may take advantage of momentum:

https://www.factorinvestor.com/blog/fal ... -investing

This phenomenon is why investors would actually be much better off in an annually rebalanced equal-weighted portfolio. A portfolio that set each position at the same weight for one year (approximately the optimal momentum holding period) implicitly buys into beaten down names ("Weakest Momentum" in the chart below) that could be about to revert in the information horizon and sells ones that have appreciated to the peak of the horizon ("Strongest Momentum" in chart below).

https://static1.squarespace.com/static/ ... ormat=750w
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: How Many Stocks In A Portfolio?

Post by Thegipper »

I hold about 20 USA stocks and a similar number of Canadian stocks. I might increase the number if I could find stocks that I thought were better then the ones I currently hold. I haven't been increasing my number.
Park
Veteran Contributor
Veteran Contributor
Posts: 1724
Joined: 13 Aug 2010 20:51

Re: How Many Stocks In A Portfolio?

Post by Park »

Equal weighting a stock portfolio is another example of a 1/N investment strategy.

http://www.ressources-actuarielles.net/ ... 0403_3.pdf

The above article found that 1/N investment strategies is only optimal when assets are indistinguishable and uncorrelated. In other words, all assets have the same return and variance, and all correlations between assets are zero. Since it's difficult to predict return and variance, a simple assumption is that return and variance are all equal. Similarly, it's difficult to predict correlation, which can be positive or negative. So a simple assumption is that correlations are zero.

For the individual investor, who has limited abilities to predict return, variance and correlation, an equal weighted strategy makes sense.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: How Many Stocks In A Portfolio?

Post by AltaRed »

I think that as long as one's 20-25 equal weighted holdings are diverse enough, and not of similar themes such as capital intensive dividend stocks
there is no need to worry about correlations.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
BRIAN5000
Veteran Contributor
Veteran Contributor
Posts: 9064
Joined: 08 Jun 2007 23:27

Re: How Many Stocks In A Portfolio?

Post by BRIAN5000 »

For the individual investor, who has limited abilities to predict return, variance and correlation, an equal weighted strategy makes sense.
This is roughly my target equal weighting at the moment, I have three groups of each Can & US stocks which I try to equal weight. Not sure way you would want to equal weight ALL stocks the same.
Equal Weight.png
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: How Many Stocks In A Portfolio?

Post by Thegipper »

I overweight positions. FB,Google,Amazon and Apple are four of them and I am happy that I was overweighted on this group.
nisser
Veteran Contributor
Veteran Contributor
Posts: 2079
Joined: 11 Nov 2007 21:24

Re: How Many Stocks In A Portfolio?

Post by nisser »

I currently hold about 50 or so Canadian and 15 US stocks.
User avatar
deaddog
Veteran Contributor
Veteran Contributor
Posts: 3422
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: How Many Stocks In A Portfolio?

Post by deaddog »

nisser wrote: 01 Jul 2018 18:22 I currently hold about 50 or so Canadian and 15 US stocks.
Are you out perfroming the index or any of the 3 to 4 ETF portfolios that show up here?
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
nisser
Veteran Contributor
Veteran Contributor
Posts: 2079
Joined: 11 Nov 2007 21:24

Re: How Many Stocks In A Portfolio?

Post by nisser »

deaddog wrote: 01 Jul 2018 19:01
nisser wrote: 01 Jul 2018 18:22 I currently hold about 50 or so Canadian and 15 US stocks.
Are you out perfroming the index or any of the 3 to 4 ETF portfolios that show up here?
I'm not sure. My annualized return last year was 17% which beat the XIC (what I benchmark to). That was with discretionary stock picking and selling. The number of stocks ballooned since I started factor investing in January of this year. I'm ahead by 2% :rofl:
Park
Veteran Contributor
Veteran Contributor
Posts: 1724
Joined: 13 Aug 2010 20:51

Re: How Many Stocks In A Portfolio?

Post by Park »

https://valuestockgeek.com/2019/04/20/i ... or-idiots/

"backtested the returns and characteristics on a simple EV/EBIT portfolio. I began with the insane portfolio of buying the single cheapest stock in the S&P 1500. I then added the next cheapest, creating portfolios ranging from 1 stock to 30 to determine the ideal size...the backtests are conducted since 2005, and the portfolios are rebalanced annually.

Image

Image

Image

Image

Image

"The deeper the drawdown, the bigger that the bounceback needs to be. Once the drawdown exceeds 50%, it becomes nearly impossible to recover from. Drawdowns of the 80% magnitude are almost certainly fatal to investment results."
Sensei
Veteran Contributor
Veteran Contributor
Posts: 1922
Joined: 07 Mar 2008 21:22
Location: Tokyo

Re: How Many Stocks In A Portfolio?

Post by Sensei »

Hi,

Hopefully I'm adding a different perspective here. I think portofolio needs to be defined better. Maybe this is self-justificatory, but the number of holdings I have would scare the pants of most of the above posters. However, they are divided up into four portfolios which I think is an easy way to manage a lot of stocks.

This is what it looks like:
US Common Stock (34)
UK Common Stock (5)
CEFs (global) 20
Canadian Common Stock (19)


I don't think any of these individual portfolios would raise any eyebrows with respect to manageable numbers. Also, each portfolio doesn't correlate (in theory) with any other portfolio. Also, each portfolio except the UK is sector diversified according to a relevant system. For example, CEFs are diversified according to 10 classifications used by CEF Stock Channel.

Whether I could do just as well with less is another question, but one qualification is I'm building income and not concerned with capital gains other than as one indicator of company strength, and therefore the ability to continue to fund my (semi) retirement.
Cheers

"A dividend being paid today is always a positive return." Josh Peters, Morningstar
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: How Many Stocks In A Portfolio?

Post by Thegipper »

All of stocks in our RRIFs are USA and we have 25 . Are Canadian stocks are in our TFSAs and are about 20.
rharvey199
Contributor
Contributor
Posts: 228
Joined: 23 Feb 2017 15:15

Re: How Many Stocks In A Portfolio?

Post by rharvey199 »

portfolio is down to 25 stocks now. that is a good number for me to manage and keep up on. if i can get it down to 20 over time that would be ideal but can't see it happening.
Flaccidsteele
Veteran Contributor
Veteran Contributor
Posts: 4523
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: How Many Stocks In A Portfolio?

Post by Flaccidsteele »

With the bulk of my equity holdings in S&P/BRKb I'm comfortable owning a few stocks. I have owned Facebook and still own Disney
User avatar
always_learning
Contributor
Contributor
Posts: 530
Joined: 01 Mar 2005 21:44
Location: Halifax

Re: How Many Stocks In A Portfolio?

Post by always_learning »

For my non-registered Canadian equities, I use a DIY index fund: a 27-stock large-cap portfolio, with roughly equal $ holdings, constructed to mimic as closely as possible the S&P/TSX 60 (sector %s as well as company %s within each sector). I buy and hold.

It accomplishes my goal: to match the performance of the index.

I do this because:
-I am convinced by the arguments in favour of passive market-cap indexing
-my algorithm forces me to ignore my gut, which has been wrong many times in the past. In particular, my algorithm often forces me to do nothing.
-I would buy a broad-based ETF if I could, but I can't because I pay US taxes, these holdings are not in an RRSP, and I don't want the PFIC paperwork hassle.

a_l
JaydoubleU
Veteran Contributor
Veteran Contributor
Posts: 3103
Joined: 13 Sep 2007 22:52

Re: How Many Stocks In A Portfolio?

Post by JaydoubleU »

I hold 20 stocks, and this is more than enough for me to follow closely. I don't try to own every sector or track an index. I simply want to own excellent companies that meet my criteria for investment. I allow that occasionally a stock can underperform (eg BNS), and so I look to management for guidance. I sell if and when I feel management is not delivering on mandates, or "outlook" comments are not reflected in actual results (eg ALA).
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: How Many Stocks In A Portfolio?

Post by ockham »

always_learning wrote: 04 May 2019 06:29 For my non-registered Canadian equities, I use a DIY index fund: a 27-stock large-cap portfolio, with roughly equal $ holdings, constructed to mimic as closely as possible the S&P/TSX 60 (sector %s as well as company %s within each sector). I buy and hold.

It accomplishes my goal: to match the performance of the index.
I'm confused. Are your holdings "roughly equal $ holdings" (which is what you say) or are they weighted by their index cap weightings (which is what you say you aspire to)?? Or maybe the index you seek to match is an equal $$ weighted index?? But equal $$ weighting entails a lot of trading??

Help me out!!
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: How Many Stocks In A Portfolio?

Post by Thegipper »

Thegipper wrote: 28 Apr 2019 21:11 All of stocks in our RRIFs are USA and we have 25 . Our Canadian stocks are in our TFSAs and are about 20.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: How Many Stocks In A Portfolio?

Post by longinvest »

Thegipper wrote: 04 May 2019 09:16
Thegipper wrote: 28 Apr 2019 21:11 All of stocks in our RRIFs are USA and we have 25 . Our Canadian stocks are in our TFSAs and are about 20.
Are you letting registered account space dictate your asset allocation?
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
User avatar
always_learning
Contributor
Contributor
Posts: 530
Joined: 01 Mar 2005 21:44
Location: Halifax

Re: How Many Stocks In A Portfolio?

Post by always_learning »

ockham wrote: 04 May 2019 08:53
always_learning wrote: 04 May 2019 06:29 For my non-registered Canadian equities, I use a DIY index fund: a 27-stock large-cap portfolio, with roughly equal $ holdings, constructed to mimic as closely as possible the S&P/TSX 60 (sector %s as well as company %s within each sector). I buy and hold.

It accomplishes my goal: to match the performance of the index.
I'm confused. Are your holdings "roughly equal $ holdings" (which is what you say) or are they weighted by their index cap weightings (which is what you say you aspire to)?? Or maybe the index you seek to match is an equal $$ weighted index?? But equal $$ weighting entails a lot of trading??

Help me out!!
I expressed myself poorly; I'm glad you asked me to clarify. I neglected to say that each sector's weighting in the S&P/TSX 60 index is reflected in the number of stocks I own in that sector, and that within each sector, I generally start with the largest companies in that sector and work my way down.

So, to answer your question, I try to use equal $ holdings by company to try to achieve market cap weighting by sector.

In the Energy sector, I bought roughly $X of each of Suncor, Enbridge, Transcanada, and Pembina. Four companies.

In the Financial sector, a larger sector, I bought roughly $X of each of Royal Bank, TD, Bank of Nova Scotia, Bank of Montreal, and CIBC. Five companies.

In the Utilities sector, a much smaller sector, I bought a fraction of $X in Fortis. Only one company.

(There are legacy and other reasons why my numbers don't exactly reflect the index's current percentages, by either sector or company -- but I hope you get the gist of what I'm trying to do.)

a_l
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: How Many Stocks In A Portfolio?

Post by ockham »

always_learning wrote: 04 May 2019 10:59 -- but I hope you get the gist of what I'm trying to do.)
So if I understand, you (in theory) equal $$ weight by company (across all sectors), but strive to cap weight by sector?? If so, do you rebalance periodically?? This strikes me as a lot of work, and as ominous for your self-description as a buy and hold investor.

I sympathize with your plight. Both natural inclination and sound argument make you a market cap indexer, but US tax reasons preclude a simple ETF approach. You're left to roll-your-own solution.

I years ago had the idea that I could with 25 holdings or so roughly replicate XIU's weightings and performance. I soon gave it up as too much work.
Post Reply