Concentration

[KenBob]

I was reading Warren Buffet and the Art of Focus Investing on Seeking Alpha and ran across a comment from Buyandhold 2012. He stated "There are 36 stocks in my portfolio, but 50% of the money is in the top 5 stocks. 18% of the money is in the top stock."

BH is well known for never selling a stock. I will sell a stock which is grossly overvalued; however, it does beg the question of whether a position which has become very large due to fundamental growth should be sold.

From a strictly risk aspect, a large position can have an oversized impact if something goes wrong. From a dividend growth aspect, a large part of the growth (and presumably dividend growth) has occurred due to only a few of the stocks in which he has invested (5 out of 36). Should we sell our winners?

I think the answer is whether you consider the growth will continue. As always, timing is a problem. My inclination is not to invest new money into the winner, but let the winners ride while continuing the normal monitoring of fundamentals. A company that is doing well is less a risk than one which is struggling.

[cannew]

Quote from my mentor:
- Diversification is not the answer, it's concentration in good dividend growth stocks!
- it's not which dividend growth stock to buy, but when you buy it!

[Dash]

I happen to agree with BH's belief regarding rebalancing: I don't do it. I also believe you can be a focus investor and not be as concerned with timing as he is. I have the same view, Ken: if a position is too big for my liking, I'm going to stop buying and not reinvest the dividends, instead using capital to build up other positions.

Buy the best companies that are currently on sale. I would only worry about balance/diversification if I was in retirement. While I'm accumulating, I'm gonna let the horses run as far and fast as they can. When you get to retirement age, you can rebalance to minimize risk.

[hendi_alex]

I think that the re-balancing question must be answered one stock at a time. Why did the position become overweight. Indiscriminate re-balancing could just skew the portfolio from a bias toward out performers toward one dominated by under performers. If the excess weighting comes from an expected bounce in a value position, then perhaps an adjustment is called for. Then the proceeds can be moved toward another value stock that happens to be in the value range. At any rate, I can think of some situations where re-balancing might be desirable and others where re-balancing is not so desirable. For me, not a white and black answer to cover all situations. Since I'm moving more of my investing into ETFs, the question becomes much less of an issue.