Weighting

[KenBob]

I was looking through the previous threads and was surprised not to find one that explicitly deals with weighting. Weighting is an extremely important part of any investment plan for controlling risk through diversification.

I see three separate aspects to the weighting decision.

First, what is the maximum percentage of an individual stock in the portfolio. This directly determines the number of stocks in a portfolio. A 4 or 5% weighting appears to be very common.

Second, how are the stocks weighted in the portfolio. This is a very hot topic currently for index funds, where price, capitalization, equally, fundamentals (a mixture of parameters used to determine economic size), and beta (volatility correlation) are used for weighting. For dividend growth investors, equal weighting appears to be common.

Third, when is the weighting applied. The weighting can be applied at the time of purchase and at rebalancing events or it can be applied to a target portfolio.

I weight stocks based on the confidence in the industry.
Higher Risk (for example financial and retail) = 2%
Basic Industry = 4%
Consumer Staples =6%
Railroads = 8%
Weighting is applied at the time of purchase with rebalancing occuring when the stock price is overvalued compared to an extrapolated 5 year value.

[earthtodan]

I came up with a weighting system where I don't have to decide on a percentage, or adjust other positions to make them add up to 100%. I just decide how much I like the stock, enter that rating on a scale of 1-5, and my spreadsheet divides up the positions into percentages.

http://dividendgrowthforum.com/showthrea...96#pid2996

I have a long growth timeframe, so I haven't quite figured out what to do when different positions grow out of proportion to their target allocations.

[hendi_alex]

For me max weighting in the overall portfolio for a single ticker is 10%. Max weighting for a sector is 20%. Guideline are pretty loose however, especially when transient plays are initiated.

No formal effort at diversification is employed in the long term dividend portfolio. Each position is equally weighted. More attention is given to yield and perceived value, than is given to aspects related to diversification. Currently that portfolio is spread between insurance, property REITs, pipeline, oil rig lease, fertilizer, health care REIT, international integrated oil, LNG carrier.

[Robandcindy2]

I use the Morningstar sectors in my spreadsheet. However, I massage these weightings using results from these two sector tools:

Fidelity Sector portfolio Builder

SPDR Sector Portfolio Builder

[hendi_alex]

In my opinion, diversification is way over rated. Especially when such is often interpreted in the context of a portfolio which is 100% invested in equities. Having a portfolio of different tickers from various sectors gives significant protection from company specific risk. But a portfolio of correlated assets, even if diversified among different sectors, gives very little to mitigate broader market risks. I used to expend a good bit of effort in trying to balance the portfolio between domestic and foreign, large cap, mid cap, small cap, spread between at least 8-10 investment classes. After the experience of 2008 and 2009, that effort has been tossed out. Now just a mild diligence is maintained, such that single tickers and single sectors don't get way over sized. Also, we used to hold at least 50 tickers in the portfolio, using the small basket approach to hit any sector, where 3-5 companies would represent exposure to any one sector. I'm comfortable holding under 20 tickers, and depending upon the selections, could be comfortable with as few as 10-12 positions.

[Kerim]

I don't really have any hard and fast rules when it comes to weighting and diversification in my portfolio. I've still got a long way to go until retirement, and perhaps as I get closer I'll be more careful about keeping positions tame, but for now, I am comfortable putting my money with my best ideas. Right now, for example, let's say that JNJ is 12 percent of my portfolio. But with luck, in 20 years my portfolio will be MUCH larger than it is now. And perhaps by then I'll have twice as much JNJ as I do now, but it will only account for 6 percent of my portfolio. I don't see much sense in buying lower-conviction stocks to maintain a certain arbitrary weightings when my entire portfolio will be much larger (I hope!) in the future.

[rnsmth]

(04-14-2014, 09:02 AM)hendi_alex Wrote: In my opinion, diversification is way over rated. Especially when such is often interpreted in the context of a portfolio which is 100% invested in equities. Having a portfolio of different tickers from various sectors gives significant protection from company specific risk. But a portfolio of correlated assets, even if diversified among different sectors, gives very little to mitigate broader market risks. I used to expend a good bit of effort in trying to balance the portfolio between domestic and foreign, large cap, mid cap, small cap, spread between at least 8-10 investment classes. After the experience of 2008 and 2009, that effort has been tossed out. Now just a mild diligence is maintained, such that single tickers and single sectors don't get way over sized. Also, we used to hold at least 50 tickers in the portfolio, using the small basket approach to hit any sector, where 3-5 companies would represent exposure to any one sector. I'm comfortable holding under 20 tickers, and depending upon the selections, could be comfortable with as few as 10-12 positions.

Sounds like you used to buy into MPT

I tend to go where company by company analysis takes me. My last buying spree was in December, 2013. While I did open some new positions, I also added to over a half dozen existing holdings. Currently have 35 companies in the portfolio.

When I have cash I like to buy good companies on (hopefully) temporary weakness.

[Robandcindy2]

Some additional reading....

http://www.investopedia.com/articles/sto...cation.asp

And

http://theguruinvestor.com/2011/12/30/ho...is-enough/

In full disclosure I am at the extreme of 100 companies, none over 1% of our portfolio.

Yes, a nightmare to re-evaluate. However, my ability to sleep is very high. Even if a company shutters it's doors while I'm off aviating and out of WIFI coverage I would only sacrifice less than 1%. And. The odds of that happening without me having at least an inkling are low. I also am in a position to use this method ONLY because I qualified for low commissions at our brokerage. Yet even at a $7.95/trade brokerage, my little homemade "Multi-Asset ETF" still has a very low expense ratio over the long run.

[cannew]

I agree with Alex, "diversification is way over rated" and I'd add that it can cause more problems than it will solves.

Find good companies and stick with them. One could get sufficient diversification with only four or five stocks. Would I worry or not sleep nights if I only owned lots of shares of JNJ, KO, ENB and BNS just to name a few and no others, not likely. I would happily live off the growing dividends they would generate.

If you only wanted four, which would you choose?

[Be Here Now]

(04-14-2014, 09:02 AM)hendi_alex Wrote: In my opinion, diversification is way over rated... I used to expend a good bit of effort in trying to balance the portfolio between domestic and foreign, large cap, mid cap, small cap, spread between at least 8-10 investment classes. After the experience of 2008 and 2009, that effort has been tossed out. Now just a mild diligence is maintained, such that single tickers and single sectors don't get way over sized...

Your entire comment expressed my views very well.

When all correlations except the long Treasury went to 1, that changed every attitude I had toward investing - stocks, real estate, everything (I had already realized that precious metals are a fool's game). The only thing left was to get on board with dividends, which I discovered in 2011 with Seeking Alpha and David Van Knapp.

Sidebar: I am retired and not in the accumulation phase. My comments are primarily directed toward those who are spending their dividends, although as a partial accumulator my thoughts might be of benefit for others.

I use a spreadsheet to track by stock type, and within type by individual stock, the following items (among others):

• portfolio percent invested based on original cost,
  
• target percent for the stock type,
  
• portfolio percent invested based on market value,
  
• current yield
  

For example, I have a stock type for upstream MLPs, another for midstream MLPs, yet another for mREITs, etc. I have guideline allocation percentages for each type, but reality invariably prevents me from hitting them. Further, I do not for the most part reinvest the highest yielders. Most of my reinvesting is into the lower yielders.

With the high yielders, I either spend the cash, or opportunistically invest in whatever I want to accumulate that Mr Market is offering at a bargain price.

I have tried to use fixed percentages, but Mr Market rarely offers what I want when I have investable cash. I must either accumulate cash or take what is on offer that I want regardless of what portfolio percentages might dictate.

---

(05-01-2014, 07:04 PM)cannew Wrote: If you only wanted four, which would you choose?

My minimal list is informed by human needs that must be met, in the context of a global civilization with global investment opportunities:

• Food = GIS. To my mind, this is the single most important stock for any investor. GIS provides basic nutrition on a massive scale, and has done so for over a century. It has paid a dividend for 115 years, and it has never reduced its dividend in that time.
  
• Water = ???. I defer to CCC experts on this. I know there is at least one water company on the list, but I have never bothered to inform myself. Take your pick.
  
• Energy = KMR. For the USA investor, this is an income generator par excellence.
  
• Addiction = PM. If you think addiction is not a human need, look around.
  

[rnsmth]

Position weights in my dividend growth portfolio


AAPL 5.5%
PG 5.2%
JNJ 4.5%
MCD 4.5%
OHI 4.5%
WEC 4.5%
GE 4.3%
O 4.2%
DLR 4.1%
SE 4.0%
KMI 3.7%
LMT 3.7%
KO 3.7%
SO 3.4%
BCE 3.3%
LNT 3.3%
CAT 3.3%
D 3.3%
CLX 3.2%
UL 3.2%
CSCO 3.2%
CVX 3.2%
WAG 3.1%
BMO 3.1%
BNS 3.1%
BAX 3.0%
KRFT 3.0%
AVA 2.9%
RCI 2.9%
GIS 2.8%
ARCP 2.4%
KMB 2.1%
NGG 2.1%
TGT 2.1%
SDRL 1.3%
POT 1.3%

[Robandcindy2]

I guess it depends if we want to correlate diversification with "sleep-ability".

Diversification among sectors?

Diversification via number of stocks held?

Diversification ala Peter Lynch:

"Of course, the reader should keep in mind that the above words are from a man that owned 1,400 stocks in the mutual fund he managed. However, in the book, he also reported that half of all his funds' assets were invested in 100 stocks, and two-thirds of his fund in 200 stocks, and he added that 1% of his money was spread among 500 secondary opportunities that he was monitoring periodically"
(http://seekingalpha.com/article/2191193-...how-part-3)

Anybody ever own a huge stake in EXC????????

Just say'n.....[/align]