How Many Stocks In A Portfolio?

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twa2w
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Re: How Many Stocks In A Portfolio?

Post by twa2w »

LAJ wrote: 30 Nov 2017 13:27 I guess I have misconstrued the concept and the thread direction then. I don't recall anyone limiting stocks in a diversified portfolio to "large cap" stocks. I guess that reinforces my admitting to be an un-sophisticated investor. I also apologize for not being able to explain my use of BAM and CSH as a "type" of stock (already widely diversified versus focused) rather than the specific stock.
I didnt respond before to your posts and may have misunderstood your intent. I am not familiar with the 2 stocks you used but I thought you were referring to buying a diversified company like Berkshire versus buying companies like JNJ, and Phizer.
Like not being sure how buying a Berkshire would fit into a portfolio of 10-20 stocks that you were trying to diversify by sector, geography etc unless you had a separate sector for conglomerates.

I suppose Fairfax, Onex, Power are possible Cdn examples more people might be familiar with.
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Re: How Many Stocks In A Portfolio?

Post by Taggart »

The only thing I target for equal weight in the non-registered portfolio are the sectors. I have near 30 individual Canadian stocks in the portfolio and most of them seem to be doing well. I don't spend much more time on this portfolio than I do on the fully indexed portfolios in the TFSA's and RRSP's.
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Re: How Many Stocks In A Portfolio?

Post by scomac »

Taggart wrote: 01 Dec 2017 15:14 The only thing I target for equal weight in the non-registered portfolio are the sectors. I have near 30 individual Canadian stocks in the portfolio and most of them seem to be doing well. I don't spend much more time on this portfolio than I do on the fully indexed portfolios in the TFSA's and RRSP's.
Our portfolios are low maintenance as well for the most part. I have to fight my tendency to want to fiddle with things when the market is moving and our holdings are just kind of sitting there minding their own business. I still do too much of that to my detriment! The most onerous task I have in reality is making a trip to the bank once a month to deposit USD dividend checks as CIBC IE refuses to sweep the funds directly into my USD savings acct. and the on-line cheque deposit capability of their banking app won't accept USD cheques!

I currently have 26 holdings in my taxable account of which one is a bond ETF and two are split share preferreds. (The necessity of meeting AA targets overall) So that makes for 23 equities of which 7 are US. On the Canadian side I have a mixture of large medium and small cap stocks. On the US side is strictly large cap stocks, just not the super cap variety. I stick to dividend growers as the goal is to generate a growing income stream over time.
When adding a new holding I look for something that doesn't have a high correlation to the other holdings. This has worked out fairly well, certainly better than what I've experienced with "managed money" in terms of total return.
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Re: How Many Stocks In A Portfolio?

Post by randomwalker »

My brother who has little or no interest in capital markets/ investing talked to me, did a bit of research on his own and came up with a four "stock" portfolio for his rrsp. He asks, "could you do any better?"

Loews Corporation L (nyse)

Berkshire Hathaway (nyse)

Fairfax Financial FFH (tse)

Brookfield Asset Management BAM.A (tse)

The portfolio is simple in its approach, go with proven winners. I might say past performance is ...

I cant argue with the result. Diversified enough????
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Re: How Many Stocks In A Portfolio?

Post by Park »

https://alphaarchitect.com/2014/09/09/h ... ification/

"Owning more stocks in a portfolio lowers “idiosyncratic” risk, or risk that can be eliminated through diversification, however…
Owning more stocks dilutes performance of an “alpha” generating process. (e.g., forcing Warren Buffett to hold a 500 stock equal-weighted portfolio would dampen his alpha)"

IOW, one has to achieve a balance between diversification and concentration.

"CAGR increases for smaller portfolios. The smallest we’ve ever tested is ~15. The corresponding volatility is much higher, making the risk-adjusted stats look worse than portfolios ~30-50…this is in line with the discussion of idiosyncratic volatility, however."
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Re: How Many Stocks In A Portfolio?

Post by FinEcon »

randomwalker wrote: 02 Dec 2017 22:03 My brother who has little or no interest in capital markets/ investing talked to me, did a bit of research on his own and came up with a four "stock" portfolio for his rrsp. He asks, "could you do any better?"

Loews Corporation L (nyse)

Berkshire Hathaway (nyse)

Fairfax Financial FFH (tse)

Brookfield Asset Management BAM.A (tse)

The portfolio is simple in its approach, go with proven winners. I might say past performance is ...

I cant argue with the result. Diversified enough????
I think so but if not just add Alleghany and Markel
Show me the incentive and I will show you the outcome

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Re: How Many Stocks In A Portfolio?

Post by Park »

This isn't about how many stocks to have in a portfolio, but it is relevant, if you're going to have a small portfolio.

https://seekingalpha.com/article/402608 ... sting-tool

Mid and Large Cap Stocks Universe, US Market, 30 stock holdings with lowest EV/EBIT in universe. I believe that the mid and large cap US stock universe is the top 50% by market cap.

He gives annual arithmetic mean returns from 12 different portfolios, with each portfolio being held for 16 years and rebalanced each year. The only difference is the start date, which is each month in 1999. The best start date is January 1999 at 26.2%. The worst start date is Sept 1999 at 12.21%. if you average the return of the 12 different portfolios, it's 17.53%.

The benchmark is the Russell 3000. He gives the return for the benchmark for a 16 year period, but with 12 different start dates. The start dates are each month of 1999. The best return was with a start date of March 1999, with a return of 6%. The worst return was with a start date of Sept 1999, with a return of 5.1%. If you average the return of the 12 different start dates, it's 5.44%.

If you're going to invest in a broad market cap index fund, the start date isn't that relevant. But if you're going to invest in a 30 stock portfolio, it is. If you decide to have a 24 stock portfolio with a one year holding period and buy/sell 2 stocks a month, the probability is considerably higher that you will achieve previously published results, than if you follow option 2. In option 2, you do exactly the same, but buy/sell 24 stocks all in one month.

This is an important difference in having a 30 stock portfolio versus a broad market index fund, and I don't think it gets the attention it deserves.
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Re: How Many Stocks In A Portfolio?

Post by OhGreatGuru »

I am not (directly) a stock investor - only indirectly through mutual Funds. But I know from reading that the "conventional wisdom" (ie. standard advice) is a minimum of 20 for adequate diversification and minimizing volatility. No more then 30, because beyond that you are splitting up your portfolio into too many bits & pieces for no measurable benefit. Some well-informed investors may go below 20, but they are usually the ones willing to sacrifice diversification in favour of gambling that certain sectors are going to out-perform others.
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Re: How Many Stocks In A Portfolio?

Post by BRIAN5000 »

No more then 30, because beyond that you are splitting up your portfolio into too many bits & pieces for no measurable benefit.
Well that's one way to look at it.

I'm doing a little bit of a portfolio review at the moment, I have 36 Individual Canadian stocks. The bottom 11 make up 1/2 to 1% of the portfolio each 8% total. Some reasons for having small positions - new entrant, building a position, riskier than usual stock. If I hit a big winner with only one of those limited positions it will make a difference on the upside, if it goes to zero on the downside I have a small Capital loss. Top 10 make up 56%.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: How Many Stocks In A Portfolio?

Post by Park »

One obvious issue, when it comes to portfolio size, is cost. Assume $10 trades and yearly turnover. With a 20 stock portfolio, that's $400; for a 60 stock portfolio, it's $600. If you want to keep those costs at no more than 0.5%, that's $80000 minimum for a 20 stock portfolio and $120000 for a 30 stock portfolio.

I assume minimal cost due to market impact. But if you're trading microcap stocks, that may be debatable.

However, I'm ignoring bid ask spread.

https://www.fool.com/investing/small-ca ... -sell.aspx

This article is from 2008, so it may not be relevant to 2017. It gives the bid ask spread, as a % of stock price for 5 stocks with market caps ranging from $US 170-855 million. For the $170 million stock, it's 0.39%. For the $855 million stock, it's 0.31%. However, there's a $370 million stock for which it's 0.52%. Every time you buy or sell, you'll pay half of that spread.

One might point out that what matters is average volume, not market cap. The $855 million stock has turnover of 57.6 million. The $170 million stock has one of 90,000. For the $370 million stock, it's 36,000. So there is some relationship to trading volume, but it's not linear.

Assume you pay 0.25% each time you buy or sell. If you want to keep costs no more than 1%, you'll need $80,000 for a 20 stock portfolio and $120,000 for a 30 stock portfolio.

If your turnover is every 6 months, double the above costs.

Based on my limited experience, IB might be your best broker to keep commissions down for portfolios in the range that I'm talking about. However, IB has a monthly $10 charge for accounts less than $100K; I believe that monthly commission costs would be deducted against that $10.

https://webcache.googleusercontent.com/ ... clnk&gl=ca

The above 2014 link states that "The average bid-ask spread for a Russell 2000 stock is 24 bps. For an S&P stock, it is 3 bps". That data is more reassuring.
Last edited by Park on 05 Dec 2017 23:48, edited 1 time in total.
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Re: How Many Stocks In A Portfolio?

Post by Peculiar_Investor »

Park wrote: 05 Dec 2017 23:24 One obvious issue, when it comes to portfolio size, is cost. Assume $10 trades and yearly turnover.
I'm curious why you would make the assumption of yearly turnover. If one is going to manage their own portfolio, I would suggest that buy and hold is a very common strategy and therefore turnover would be kept to a minimum.

To the best of my recollection I cannot recall turning over or trimming more than five names annually.
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Re: How Many Stocks In A Portfolio?

Post by Park »

Peculiar_Investor wrote: 05 Dec 2017 23:42
Park wrote: 05 Dec 2017 23:24 One obvious issue, when it comes to portfolio size, is cost. Assume $10 trades and yearly turnover.
I'm curious why you would make the assumption of yearly turnover. If one is going to manage their own portfolio, I would suggest that buy and hold is a very common strategy and therefore turnover would be kept to a minimum.

To the best of my recollection I cannot recall turning over or trimming more than five names annually.
It depends one's strategy. Even then, there's some flexibility. There's data supporting a quantitative value strategy with rebalancing every 5 years.

Another factor in determining how many stocks is the investor. Can one tolerate high volatility in a concentrated portfolio? Each investor has to answer that question for themself.
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Re: How Many Stocks In A Portfolio?

Post by Shakespeare »

Can one tolerate high volatility in a concentrated portfolio?
You can always concentrate in low-volatility stocks, although the risk of a black swan remains.
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Re: How Many Stocks In A Portfolio?

Post by hboy43 »

Hi:

Currently 19 stocks. Been as high as 26 or so.

Average 10 or so transactions a year over a 1/3 century for both my wife and myself over all margin, RRSP, TFSA, cash accounts.

So excluding the mutual funds that came with my wife at marriage the MER is 100/x,xxx,xxx, or pretty damn low😀

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Re: How Many Stocks In A Portfolio?

Post by scomac »

I'm a fair bit more active than the majority here. I have averaged 39 transactions per year on a stock portfolio that runs between 25-30 names, so that makes for a fairly healthy turnover, although I tend to come and go into the same group of companies. I did mention previously that I have a tendency to want to fiddle. Several of my positions I've held for many years though so a lot of the fiddling takes place on the periphery. 2017 has been my best display of patience as I only had 16 transactions most of which revolved around trimming to follow my IPS guidelines and an in-kind donation of shares.

[Added] I should point of that this is a taxable account and I do actively manage my holdings to take advantage of losses to realize gains as tax efficiently as possible. My tax liability will be considerably less than a strict buy and hold portfolio.
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Re: How Many Stocks In A Portfolio?

Post by AltaRed »

I have been more active this year. I have 14 transactions across all accounts. two in the RRSP to roll over maturities in my bond/GIC/debenture ladder, four in the TFSA as I re-position holdings to MAW104, and the rest in my taxable accounts, a few of which are rate reset pref swaps.

I expect 2018 will be half that (four of which I already know about in TFSA and RRSP). I typically end up with 2-4 others in taxable due to re-positioning disappointments and/or to tap into capital to fund my lifestyle, or to trim out-sized positions.
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Re: How Many Stocks In A Portfolio?

Post by SQRT »

I have about 12 names in my bank heavy, 100% equity portfolio. Haven’t bought anything new in 2 years. Sold down a bit to take some money off the table with the proceeds going to higher spending.
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Re: How Many Stocks In A Portfolio?

Post by Park »

As mentioned upthread, there is a conflict between seeking alpha from a strategy by concentration and decreasing volatility by diversification.

Volatility has several negative features. First of all, it can test an investor's resolve, when it comes to sticking with a strategy. It can also be financially detrimental, such as to a retiree. Volatility is a reason why SWRs have to be lower.

But one feature of volatility, that may get less attention than it deserves, is that it decreases return. Volatility is why compound return is almost always less than arithmetic return. The decreased return due to volatility is called volatility drag. It's measured by squaring volatility, and then dividing the result by half. Volatility is measured by the standard deviation of the return sequence.

https://alphaarchitect.com/2014/09/09/h ... ification/

The link above has a graph relating portfolio size to standard deviation. There's a dramatic decrease in volatility when one goes from 1 stock to 5 stocks. It continues to decrease after that, although the decrease slows down considerably.

Now that paper is from 1977. I have read that the correlation between stocks has increased since then, and more stocks nowadays are required to get the same reduction in standard deviation. Also, I believe that in the paper, it is assumed that the stocks of a portfolio are diversfied. As a strategy commonly results in stocks having similar characteristics in a portfolio, the decrease in standard deviation, associated with an increased number of stocks, may be an overestimate for many investors.

Nevertheless, there is the conflict between seeking alpha and decreasing volatility. To maximize alpha, you want to concentrate your portfolio. One could conceive of a situation where to maximize alpha alone, one would want to have one stock in a portfolio. But the increased volatility, and resultant volatility drag, of such a portfolio might overwhelm the increased alpha and you might have a decreased return. OTOH, you could minimize volatility and the resultant volatility drag by maximizing portfolio size. But that would result in minimal alpha. Such a minimal alpha portfolio is called a market cap indexing strategy.

So for most strategies, there has to be a balance between seeking alpha and minimizing volatility drag.
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Re: How Many Stocks In A Portfolio?

Post by kcowan »

About a dozen transactions to keep TFSAs invested, backfill maturing bonds in RRIFs, expanding some sector holdings. Some rebalancing. 30 separate holdings.
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Re: How Many Stocks In A Portfolio?

Post by 2 yen »

kcowan wrote: 06 Dec 2017 15:06 About a dozen transactions to keep TFSAs invested, backfill maturing bonds in RRIFs, expanding some sector holdings. Some rebalancing. 30 separate holdings.
Similar here. 2 sells in registered to be rebought in the TFSA's. That makes 4 transactions. Maybe one or 2 other rebalancing bits and bobs.
Thats it.

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Re: How Many Stocks In A Portfolio?

Post by Peculiar_Investor »

To maintain a proper comparison about the annual costs due to turnover in a stock portfolio, we should only be considering stock transactions and not be including bond/GIC and other fixed income transactions.
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Re: How Many Stocks In A Portfolio?

Post by AltaRed »

If the objective is to calculate cost, then yes, I suppose, but bonds have a commission cost too....while mutual funds normally don't. I bought 2 bonds in my RRSP this year @ $24.99 each. If the objective is churn/turnover, then the counter probably should count each transaction. OTOH, specific accuracy is not likely as important as themes and trends among us. FWF membership seems to run the gamut from prolific traders to doing virtually nothing.
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Re: How Many Stocks In A Portfolio?

Post by Peculiar_Investor »

I'm working back to the OPs post here where the matter of cost first entered the discussion,
Park wrote: 05 Dec 2017 23:24 One obvious issue, when it comes to portfolio size, is cost. Assume $10 trades and yearly turnover. With a 20 stock portfolio, that's $400; for a 60 stock portfolio, it's $600. If you want to keep those costs at no more than 0.5%, that's $80000 minimum for a 20 stock portfolio and $120000 for a 30 stock portfolio.
Since this is a discussion about the number of stocks to have in a portfolio and the associated costs, to maintain an apples to apples comparison it should exclude any transactional costs other than buying or selling stocks.
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Re: How Many Stocks In A Portfolio?

Post by AltaRed »

Okay, missed the specifics of that post. As others have said (I think), that is an extreme case. My rule of thumb would be to keep costs below 0.1%.
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Re: How Many Stocks In A Portfolio?

Post by ockham »

Peculiar_Investor wrote: 06 Dec 2017 17:49 I'm working back to the OPs post here where the matter of cost first entered the discussion,
Park wrote: 05 Dec 2017 23:24 One obvious issue, when it comes to portfolio size, is cost. Assume $10 trades and yearly turnover. With a 20 stock portfolio, that's $400; for a 60 stock portfolio, it's $600. If you want to keep those costs at no more than 0.5%, that's $80000 minimum for a 20 stock portfolio and $120000 for a 30 stock portfolio.
Since this is a discussion about the number of stocks to have in a portfolio and the associated costs, to maintain an apples to apples comparison it should exclude any transactional costs other than buying or selling stocks.
Park's trading cost assumptions need fine-tuning. The Canadian side of my equity portfolio consists of about 25 stocks and one ETF. My trading costs in 2017 total $30. That's for one sale (closing one position) and two purchases (adding to existing positions). The ex-Canadian side consists of broad market ETFs, where my 2017 trading costs total $20. That's one buy in my TFSA and another in my partner's TFSA.
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