Number of Stocks in Long Term Portfolio

portfolio-makeupThere are two questions that will always haunt any long term investor. One is about what is a right asset allocation, and second is how many stocks one needs in a long term portfolio. I do not think there is any boiler plate type of answer to these questions. I believe while it is absolutely necessary to have an optimum asset allocation and multiple number of stocks, the actual percentage allocation or number of stocks will depend upon individuals risk profile, willing to learn, willing to spend time reading about companies, etc. In addition, these two aspects cannot be generalized and it cannot be a static numbers. These have to be dynamic and should change with the investing time period. Having said that following is my thought process for my long term portfolio.


In my case, I am looking to companies that pay dividends and have potential to grow over a period of time. It is my belief that as companies grow their earnings, they will grow their dividends (this addresses my cash flow or income objective). In addition, it will also be accompanied by capital appreciation (this addresses my objective of wealth accumulation). The question is how many companies should I include in my portfolio?


My vision is that I should have approximately 25 to 30 companies that occupy up to 75% of my investing portfolio. I view this as a core portfolio. The companies that I plan on including in this are the ones that are somehow associated with India’s growth story or ones that sell into Indian market.

  • The rationale of using 25 to 30 companies is that I want to limit my dividend exposure to any single company to maximum of 5%. In one my earlier post, I have discussed the process of risk management and asset allocation.
  • I do not expect 100% success rate in my company selection. Keep with this, I expect that 15 to 18 companies will perform as per my initial expectation and will continue to provide growing dividends over time. I also expect that they will continue to increase their value.
  • The remaining 12 to 15 may or may not perform, and hence I will have to continue to make changes such as adding to existing ones, removing, and adding newer ones.


Furthermore, I tend to think that it would be nearly impossible for me to keep track and closely follow more than 30 companies. This is what my present thought process is. I will see how it works out and will adapt if necessary. One the benefit of long term investing is that you do not need to keep following the market daily or monthly; the companies that you select are not going to vanish or crash in such short period of time.


Thanks to The Dividend Guy for asking me the question and inspiring to write this post.

What is your opinion about number of stocks? How many do you own?










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18 Responses to “Number of Stocks in Long Term Portfolio”

  1. Shanmuham.S says:

    The more the companies in your list, the more time you have to spend to follow it up on day to day basis. so 20 cos watch list is ideal for one who has not much time to follow .

    Also i do hope it differs from person to person and the amount of investible money.
    thanks
    shanmuham.s

  2. I started with 40 Companies since 2005, then came down to 20 then 9 and currently I have only 2 companies in my portfolio. BILT & Diana Tea. 65% & 25% exposure respectively.
    The reason behind this weird portfolio is I convinced myself that, I have got to know their business. (Every Jack thinks like this..) Don’t know but i hold boththe companies for trading purpose. I will be out when i will have sufficient returns. I learned this in Bank of maha. where i bought at 21 sold at 40 and got Handsome divd. That time Bank of maha was 65% of my portfolio.

    I trust buffet and his ways of trading, and trying to practice them.

    • TIP Guy says:

      MIP,

      Do you really think Buffet and trading go together? Until 1Q2009, Buffet had invested in 41 companies. He has been in the range of 40 to 60 companies for last 15 years or more! Of which in 12 to 15 companies, he has remained invested for more than 20 years…

      Best Wishes,

      • For me there are two Buffets.
        A)Buffet who handled private partnerships successfully from 1957 to 1969.
        B)Buffet from 1969 till date..

        These two buffets existed in two different investment & trading era. Second buffet switched his partnership to BRK when there was a long bull cycle about to start. trading mentalities were different and whole atmosphere was filled with euphoria.
        First buffet only had $100k as working capital (with own contribution of $100) and we all know that at the time he dissolved his partnerships he had his share of $25m.

        I will not narrate the whole history here. but will surely advice you to read his Partnerships letters carefully. You will come to know how he traded like experienced wall street trader.

        Trade like Buffet is an excellent book to look into buffet’s unexplored side as a trader.

        • MIP guy, this is very true. I agree with you that the efficiency of buy and hold are significantly reduced since the days of Graham

          Thank you both for enjoyable and thought provoking writings.

  3. You may want to download his partnership letters from here..

    http://www.ticonline.com/

  4. TIP Guy says:

    MIP,

    Thanks for the link. I will read it.

    Best Wishes,

  5. R.V.RAO says:

    hi friends,
    pl. do not limit by numbers for a successful portfolio.
    in our this website itself,it is recommended 5 longterm stocks like ntpc,ongc etc..
    iam surprised sbi and reliance r not there.these two gaints figure in top 10 in the world itself.
    as and when you find a growth story of companies like bharti airtel,( they grow verticaland horizontal also gradually)it should find a place in our portfolio.
    then do not forget to profit from stock markets ups and downs.this sis apart from longterm portfolio.
    to get regular monthly income for people like retirees,
    i suggest go to [moderator removed link] make regular cash flow.i made money from here and i recommend to all to do same.
    options and futures ,commodities alos do not ignore.with a little study, there is money to make.
    share your ideas and reactions,please.
    rgrds,
    R.V.RAO

    • TIP Guy says:

      Hello R.V.Rao

      I removed the link you included, because it was not related and does not add value to the discussion.

      I am not limiting number of shares for a successful portfolio. My limit is based on my time constraints or my ability to manage. Certainly, it is individual’s choice and one’s ability to manage and be comfortable with it. But I doubt one can do it proficiently unless it is full time profession.

      (1) Regarding SBI and Reliance – I have said many times on this blog I like Ferrari and would love to have it. But they are just too expensive to have it. I would love to have a penthouse with sea views. Unfortunately, they are also expensive. SBI and Reliance are great companies with good management. And like you, everybody else knows about it. Therefore, they are always very expensive. If share price for both companies are in fair value or get cheaper, then yes, I would jump to buy them.

      (2) Same from Bharti Airtel – they are good companies and well positioned for future growth. But I am not willing to pay the market price it trades on. Too expensive! Regarding making money from growth companies like Bharti Airtel, one needs to buy shares/stocks before the growth curve (and not when it becomes famous and already becomes big). Personally, I find it hard to determine which new company will become big and successful, so I avoid it. Yes, I will buy if their share price becomes cheaper. By cheaper I mean cheaper in value (and not cheap in absolute Rs. amount).

      (3) Making money from market volatility: I personally do not have appetite and time to follow market gyrations. In addition, I am not skilled enough to be a consistent winner in trading. Making money consistently over a period of time by trading does not fit with my thought process or personality. I have determined, for my wealth accumulation, long term investing is only way to go and I am very confident and comfortable with it.

      (4) I do not like Options and Futures as a product. They are speculative driven and hence I consider them crap. So I stay away from them. I am happy for folks who make money from these products. But it’s not for me.

      Message is; there are so many different ways to make money. It is important to understand what you are good at and focus only on that aspect. It is not necessary to jump on every other method just because other person is doing it or some advisor or planner is saying to do it. Key is consistency over time and total return.

      Best Wishes,

  6. Karthik says:

    Hi,
    I found your link through Rohits page. Excellent articles.

    I have one query on this portfolio balancing. Sould we measure the portfolio based on the cost price or the current market price . For example Stock A and B at the time of purchase might have formed 20% and 10% of my portfolio. Due to market conditions, A might become 40 % and B might be 5 %. Should I sell part of A to retain the portfolio balance?

    • TIP Guy says:

      Kartik,

      Very good question and I think I will elaborate in a separate post.

      Re-balancing should be based on your expected return for any particular stock/idea/investment position.

      In my view, making decision based on market pricing or cost basis is good for trading or churning strategy.

      It is not right way to re-balance in long term buy and hold philosophy.

      Stock A: year after year how much return are you getting? Returns could be intrinsic value increase, includes dividends, includes book values, etc, depending upon what you are looking for. For the sake of calculation, let us say you get 12% consistent return. Now you sell position worth Rs. 1000 in Stock A. And then you decide to invest somewhere else. Can you expect to get 12% or more return in new idea/position/stock? If yes, then go for re-balancing. If not, then what is the justification? Why do want to take invested money from high return to low return position?

      Stock B: It has become 5% because it may probably be not giving you your expected return? in that scenario it is better to sell this one even though it is only 5% of your portfolio.

      e.g. in TIPBlog portfolio, I have few companies like ONGC, NTPC, LNT, HDFC, which give approx 15% consistent return (dividends+value). Now they do occupy more then my desired risk level. But unless I can find another stock with similar consistent returns, what is the motivation to re-balance. So to manage risk, I do not buy new position, but I also do not sell any existing ones. On relative basis risk is low because these companies won’t go kaput in next 3 to 5 years. Over time, the portfolio will get balanced.

      I hope this helps!

      Best Wishes,

  7. Karthik says:

    Hi, Thanks a lot. That was helpful . I was in two minds about some stocks like Balmer,Crisil e.t.c which has exceeded my portfolio limit ( I try to retain 15% balance on my core).
    Have you analyzed Balmer Lawrie ?.. Good fundamentals with good divident history..Would appreciate your views on the stock.

    I agree with you on GE shipping. Iam also trying to get out of my position.

  8. chetan S. Raut says:

    hi,
    i feel for long term investing shipping stocks will do better,as they involved in domestic market and demand of shipping remain long term.so is it good sector to invest?

  9. chetan S. Raut says:

    are you going to provide analysis on cement sector…specially india cement and ultratech cement..

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