Oversize Positions Don't Worry Me -- YET!

[Kerim]

So I see a lot of DG investors talking about not letting any one of their holdings get too big. That is, say they have 25 stocks, then they are careful to try and keep each holding to around 4 percent of the total portfolio. I get that the idea is to not put too many of your eggs into any one basket, so that if one of them, or even a whole sector, takes a beating, your risk is minimized.

To me, this kind of worry might make sense once your portfolio is about as big as it is ever going to be. If you already have your $2 million portfolio of 25 stocks, it might make sense not to let any one position get too much larger than $80,000.

But if you are early in your accumulation years, and have a $150,000 portfolio of, say, 15 stocks, and an eventual goal of having a $2 million portfolio of 25 socks, then I think it makes little sense to worry too much about keeping each of your current 15 stocks to no more than $10,000.

Imagine if one of your 15 stocks is JNJ, and over the years you plan to build an approximately $80,000 position in that stock (as one of the 25 stocks in your well-balanced $2 million portfolio). I'd opportunistically add shares whenever the value was good, not worrying (much) about the relative weight during the accumulation phase. It is too much to worry about and too much of a limitation. Why not capitalize as much as possible on your best ideas? If one stock is a screaming value right now, and I eventually want to own hundreds of shares of it, it makes little sense to me to put that money into other stocks that are not as well-valued right now just to maintain balance in the portfolio.

So I say, during the accumulation years, buy when the opportunities are present, without worrying too much about equal weighting.

[bobbyboy1970]

Oversize positions dont worry me AT ALL, because I have not bought anyhting at all yet. I read and I read, and I think that dividend stocks are the right way to go, but I am too nervous to put my money where my mouth is. And the market keeps on going up and up.

[TomK]

Hi bobbyboy -- So you never bought those shares of MCD that you were considering, I guess?

As they say, the journey of 1000 miles begins with a single step. It sounds like your problem is more nerves than anything else. Why don't you just buy a few shares of something, for just a few hundred dollars. Then the most you can lose is that few hundred dollars. Nothing more. But you probably won't, if you select a quality DG stock. And you'll get comfortable having some actual skin in the game. You'll see how it feels to watch your actual shares rise and fall in value, and you'll see how it feels to get those dividend payouts. Maybe you'll learn that this sort of investing just isn't for you. Or maybe it will be your first small step towards building your own 100 moments of happiness.

[Horace Cugle]

One of my hangups is investors holding equal weight positions and trimming every quarter. 50 - 2% positions.

I know why they do it, I just don't understand why they would want to do it. I get that it's a methodical, unemotional approach and there's safety in numbers.

What I struggle with is why would they want to dilute their best holdings with lesser quality stocks. You do have to be diversified, nobody would argue you shouldn't, it's just where do you draw the line? If 50 2% positions gives you comfort then why not 100? Why pick any number at all?

I hold some rather large (5%-9%) positions in MO, PG, JNJ, WAG, COP, T. They got that big because when I had new money, the best place to put it was in something I already owned. When PG dipped down to $60 a year ago I tripled my holding in the company and feel perfectly comfortable with a 7% position. Would I feel safer or better splitting that position equally among PG, CLX and CHD? Nope.

Anyway, portfolio strategy and proper allocation of money is a topic that has always interested me. I hope some others will chime in. Thanks.

[Kerim]

Hey Horace! Welcome to the forum.

And nice first post. I could not agree with you more about this. On the recent dip, I could have tried to find something to further diversify my holdings -- I've got positions in 19 different stocks right now. Some would argue that is way too concentrated and I should be looking for number 20. But of all the stocks I looked at, I was convinced that PM was the best value and has the best prospects. I was not about to pass up the opportunity because I already have a "full" position in it. I added more and have no regrets -- letting my best ideas run. I'll add number 20 when I find another excellent DG stock at a compelling value.

And as I said in the original post, this is especially true in the accumulation phase. I hope to eventually own a lot more of all the stocks I currently hold, and more. I'd be an idiot to pass up a great opportunity to buy more shares at a great price just to satisfy some arbitrary threshold. Each of my three largest holdings (MO, JNJ, INTC) are over 10 percent of my dividend growth portfolio, and I sleep just fine.

[Horace Cugle]

Exactly, you got it!

I started buying MO in 1998 when there was tobacco litigation issues in the news. IIRC, MO had been $80 and I bought it at $40, $28 and doubled down at $20. I bought more in 2004 and 2008. Now I own it at $7 a share.

I seriously doubt I could have done better buying anything else in my stock universe and MO is almost 10% of my portfolio now, and PM almost 8%. If I'd trimmed either every time they got 1/2% out of whack I'd want to slash my wrists.

So I do the same with the other great companies mentioned earlier. A few months ago I added again to PG at $76.50. Did I like paying $76.50 when I owned it in the low $60's?; heck no but it was the best thing available at the time. Same with WAG just last week at $44.20, but to each his own.

As one prolific young writer who publishes articles with interchangeable titles writes: buy (insert blue chip stock), hold forever and you either get rich or at worst you get a nice dividend stream. He's correct, although the theme has worn me out.

He must have heard me thinking though because the new theme is inflate analysts' forward EPS and historical PE to numbers you like and presto, you're rich!!! And readers love it, YIKES!!

[TomK]

I'll say right up front that I agree with you both. Worrying about maintaining exact 2, 3, or 5 percent positions in each of your holdings is needlessly worrisome, leads to counterproductive portfolio churn, and probably hobbles your long-term results because you are forced to put money into less attractive stocks.

But I think you nailed it Horace in saying:

(07-11-2013, 09:49 PM)Horace Cugle Wrote: I get that it's a methodical, unemotional approach and there's safety in numbers.

I think some people are nervous investors, and we have to admit that the market can take even the strongest minded people on one hell of an emotional ride, especially when your nest egg is on the line. So I think these hard and fast rules help some people have a sense of control and certainty. And even though we do not agree with the approach, if it enables them to move towards their goals instead of buying and selling willy-nilly, I guess it could be seen as a good. At least they have a plan and are sticking to it, which is more than can be said for many "investors."

Tom

[Horace Cugle]

Like that commercial says "I trade like me". And I agree at least they have a plan and stick to it, whether it makes sense to me or not.

I have tried out smarting the market many times, some you win and some you lose. Having a bunch of moving parts in your portfolio is exciting I suppose, I just let things be unless the picture changes.

[bobbyboy1970]

Well hang on a minute. You guys would not advise me to put ALL of my money into a single stock, right? But isn't that the implication of saying you should stick with your "best idea"??

[Horace Cugle]

I certainly didn't say that and I mentioned the need to be diversified. I just don't see the need to take it to extremes. But they can do it any way they want it's their money, no right or wrong.

[Kerim]

Yeah, bobby. My point wasn't that diversification is not important, but rather that strict adherence to some arbitrary, small target percentages is counterproductive.

[bobbyboy1970]

Ok, ok, I think I get it. Being over-diversified is hardly my problem, anyway. Being overly-poor is! Good thing I have a looooooooooong way to retirement, because right now I am a lot closer to working at mcdonlds than living off the income from it.