I’ve said several times before that because I am still deep in the accumulation phase of my investing career, weightings and allocations do not concern me too much. Whenever this topic comes up, I imagine making a couple of charts to illustrate my point. Well, this thread finally got me off my butt.
I completely believe that target weightings are important, but only when your portfolio starts to become fairly large and mature. In the early phases of building the portfolio, being overly concerned about maintaining equal-sized positions serves mainly to tie your hands such that you miss the best opportunities.
So here is my illustration. The first picture here is a (somewhat fictionalized) picture of my portfolio right now.
Obviously, it is really lopsided, hugely exposed to XOM and MO, for example, both of which would appear to be waaaay beyond a “full position” relative to the current size of my portfolio. If I focused mainly on the value of my current positions, I would be crazy to add more XOM, even at bargain basement prices. It just isn’t safe to have so many eggs in that one, basket right?
Well, not so fast. Here is another picture, this one showing the same current positions (in blue) against the portfolio that I am hoping and planning to ultimately build (in orange).
This is the point I’ve tried to make several times in words. My ultimate portfolio is going to be – I hope – a whole lot bigger than my current one. And to fill it out, I am going to need a lot more of ALL of the companies I’ve got, and of some others too. Even though XOM is a disproportionate share of my current portfolio, I need to buy a bunch more to complete my eventual portfolio. From this perspective, it is clear (to me, at least) that I should buy XOM whenever it presents a compelling value. Sure, I could buy more PG instead right now to achieve a better short term balance, but that will put a major drag on my performance, because PG is (in my opinion) a far inferior value right now.
So yes, the target weightings of your positions is important, but you should make that evaluation based more on where your portfolio is heading, and not its current values. Unless you are near or in retirement, better to focus your new funds on the best opportunities you can find rather than constraining yourself to keep your relatively small positions artificially balanced.
(Again, these pictures are illustrative only -- these are not actual target positions!)
I completely believe that target weightings are important, but only when your portfolio starts to become fairly large and mature. In the early phases of building the portfolio, being overly concerned about maintaining equal-sized positions serves mainly to tie your hands such that you miss the best opportunities.
So here is my illustration. The first picture here is a (somewhat fictionalized) picture of my portfolio right now.
Obviously, it is really lopsided, hugely exposed to XOM and MO, for example, both of which would appear to be waaaay beyond a “full position” relative to the current size of my portfolio. If I focused mainly on the value of my current positions, I would be crazy to add more XOM, even at bargain basement prices. It just isn’t safe to have so many eggs in that one, basket right?
Well, not so fast. Here is another picture, this one showing the same current positions (in blue) against the portfolio that I am hoping and planning to ultimately build (in orange).
This is the point I’ve tried to make several times in words. My ultimate portfolio is going to be – I hope – a whole lot bigger than my current one. And to fill it out, I am going to need a lot more of ALL of the companies I’ve got, and of some others too. Even though XOM is a disproportionate share of my current portfolio, I need to buy a bunch more to complete my eventual portfolio. From this perspective, it is clear (to me, at least) that I should buy XOM whenever it presents a compelling value. Sure, I could buy more PG instead right now to achieve a better short term balance, but that will put a major drag on my performance, because PG is (in my opinion) a far inferior value right now.
So yes, the target weightings of your positions is important, but you should make that evaluation based more on where your portfolio is heading, and not its current values. Unless you are near or in retirement, better to focus your new funds on the best opportunities you can find rather than constraining yourself to keep your relatively small positions artificially balanced.
(Again, these pictures are illustrative only -- these are not actual target positions!)