There 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?
asset allocation, dividends, number of stocks in long term portfolio, risk profile