Diversification - how many stocks is too many?

I think the point about the 15 is that it takes a lot of time to properly research companies enough to have the edge over other people, so I think it’s a compromise between having a small number so you can spend enough time to ensure they’re still quality picks and large enough for diversity in case one has big problems.

Specifically, he’s saying that if half the companies are just average because you didn’t research them well, they’re pulling down the rest of portfolio where you did put in the effort.

As you get to riskier companies, you need to diversify over more companies, because you might be looking for 500% growth in one company and the rest failing entirely compared to stable markets where you might get 0-20% growth across all of them.

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That’s a fair point.
What I had missed is you couldn’t just do your research once and accumulate more companies over time; you would need to regularly research your existing holdings to make sure they continue to be good investments.

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This is very important, the estimates that led me to buy some stocks would now strongly suggest a sell. It’s important to revisit the assumptions in those models after some time (and especially if the price has grown a lot) and decide if the new value is justified by revised earning potential or if it has become a sell.

I’ve spent ~2hrs updating my models for ASML and TSMC recently and they only have about 6 SKUs, I can’t imagine doing that for 30 companies with many more products.

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I guess it’s, perhaps, the amount of stocks that have a strong fundamental thesis

Industrials and utilities are missing, which are big sectors.

I’m new to investing, but I think my long term approach will be to divide the money I put in, and the returns, in roughly this way:

40% in a few ETFs - most in relatively standard fare subject to good due diligence on my part, and then maybe a quarter of it in a slightly more conviction-driven direction.

30% spread across a maximum of 10 somewhat diverse, equally weighted stocks where the long term fundamentals look good and where I understand at a base level how they make their money and why they are well positioned within the industry (this is the hardest bit and that’s why I want as few stocks in this bracket as I can credibly go with). Changing a position in these stocks should be a relatively big call because the idea is that I’m backing companies I understand to on average outperform their industry (without that outperformance needing to be earth-shattering).

20% where I target maybe a dozen give-or-take stocks in volatile sectors, where I’m managing them somewhat more actively. I’d evaluate them more frequently. On the one hand I’d be more willing to sell than the ones above if I think short term growth is more of a bubble than a trend and I have a suitable buy lined up, but the whole point of going for high risk is that you’re looking for an instance of “explosive” growth or 2-3 of “great” growth to cover off some near-certain duds.

10% completely free hand and very much a short term outlook - not day trading but short term. Stocks where I feel the market has overreacted and will bounce back, possibly in short order. Company restructure and/or special dividend situations where I believe I have a feel for how it will play out and that I can make a tidy profit, and am relatively confident that I can time things to break even if I’m wrong, that kind of thing.

So my portfolio would probably be around 25-35 holdings at a given time. But why it’s that number is more important than the number IMO.

Have you read this thread? Diversification is not an opinion, it’s just math. Since you’re at least 40% in ETFs, your diversification goes into the hundreds or thousands of companies anyway, which should reduce the unsystematic risk substantially/fully.

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Okay SebReitz thank you what sock do you think I should invest in for a good solid start old stocks like TESLA etc.

           Regards Alan Penni

Hello Cameron Please what stocks should I invest in at first good solid stocks like Tesla etc Thanks.

Regards Alan Penni

Welcome, @pennyshares Tesla is not an ‘old stock’, it’s still very new and potentially volatile. I’d suggest the forum is not the place for financial advice.

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Hi Doubledig you good ? No why is that ? where do I get advise then please Doubledig

Seek advice on investments from a qualified financial adviser or do your own research. While forum members might give their own opinions it shouldn’t be seen as financial advice. Read the forum rules.

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Okay thanks JWT

Hi @pennyshares welcome to the forum.

Without any knowledge of you, you’re goals, risk appetite, how long you want to be invested and if you have any preferences as an investor there isn’t anyone who can help you. In many ways it’s a journey you need to go on yourself but you don’t need to grope at the investing world alone with no Sherpa. Freetrade have a few good articles here Learn about investing with Freetrade’s guides and that should be a good start.

For my two pence (cents if you invest in American stocks)

  • Diversity is king and the easiest way is a good ETF (exchange traded fund) these charge a small fee to keep it balanced and track the chosen target as closely as possible. Some can be broad VWRL etc and some can be quite specific. Start board and go from there.

  • Don’t let it take over your life, keep it simple and try not to check 3 times a day. Often the best decision you can make is not to trade.

  • Take your time. If your horizons are in years or decades then waiting a few days to read an extra article isn’t going to kill you.

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Good Sounding Advice

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Hi Alan, you shouldn’t seek out stock picking advice online, from me or anyone else. Just to address the matter at hand I would strongly disagree that Tesla is a ‘good solid’ stock, it’s speculative - for reasons well summarised in the video below:

As you are (probably) new to investing I think the first thing to do would be to look at very broad financial education to start with. Before you even start think about individual stocks you should think about your financial goals, which will determine the asset classes and risk factors you want exposure to.

Seek advice of educated professionals who will not introduce their own biases or interests (intentionally or otherwise) into your investing decisions.

These Youtube channels are run by CFAs/PMs/Financial Advisors and answer almost any question about personal finance & investing without recommending a particular stock, manager or strategy, the later two have a UK focus.

Spoiler alert: at this point most resources will point towards broad, low cost, diversified passive equity funds if you have a long horizon and large risk appetite.

Stock Picking

Really there are no shortcuts, stock picking is a zero-sum game with millions of participants collectively spending billions of dollars on research to win. So you need to do your own research, which generally means coming up with a good estimate of the intrinsic value of a company, which most likely means creating a DCF model.

Aswath Damodaran (a.k.a the Dean of Valuation) is probably the go-to teacher for this and luckily he has posted a lot of videos online which will tell you almost everything you need to know. His Spring 2021 course is the most recent and has 28 sessions.

Here’s the start of one of his older series on valuation

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Amazing post @Cameron absolutely spot on :clap:t2:

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Good advice but I just can’t stop checking my portfolio a 100 times a day nevermind 3.

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The key is to give advice you want to hear, I’m in double digits most days! :man_facepalming:t2:

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I found it to be a function of time that I’ve already been investing. At the beginning checking is very frequent, but after more than 10 years now, I rarely check my portfolio outside of buying more (I do hang out here a lot but don’t check my freetrade portfolio haha).

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