04-30-2013, 04:24 PM
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.
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.