For the average personal investor, forty stocks is a lot to be owning and constantly rebalancing. Wouldn't one be just as well off buying sector mutual funds (or ETFs) and allocating their percentages?
It is a bit of a short cut to think in terms of the "average investor." The best framing of this conversation is that each of us has a unique capacity for the number of holdings that we can keep track of. This is typically going to be based on time available and the level of interest in the subject. For some people it is also a matter of how much skill they have, harsh as it may sound some people should not use individual stocks (I tend to believe that people with middling skill can still do quite well with individual stocks).
One way to look at this is to think there are three types of products; broad based funds, narrow based funds and individual stocks. To the reader's question some individual investors will clearly be able to handle 60 stocks in their portfolio. Certainly not most people but a capacity for something like 50 or 60 names is would not be so shocking although clearly more than most people.
Also to the reader's question yes, some combo of sector funds makes a lot of sense for a lot of people for a lot reasons. This doesn't have to mean just ten ETFs (one for each sector) but for a larger sector like maybe energy or tech more than one fund (targeting different segments, or a core and explore idea) and for a small sector like utilities perhaps one fund would suffice.
A do-it-yourselfer might be somewhat comfortable for whatever reason with stock selection in four sectors and go with ETFs in the other six. Another framing might be one stock and one ETF for each sector.
Ok, so you get the idea. The important thing with this is figuring out what you can and cannot do. An investor would not be better off doing anything but what they can understand, can live with and plays into their level of time and interest. Any, and I mean any, approach can work. There was an odd comment yesterday or the day before where the reader said the only way to beat the market is... which is of course ridiculous. I am quite sure he has success with his way but as I have said before there are people having legitimate success with every strategy you have ever heard of. That is not to say that you or I would have success with any strategy just that anything can work.
A big part of what I do is figure out what to avoid. It is not relatively time consuming and makes the rest of the task much easier. This is probably not unique to top down investors, not terribly precise but still may not work for you. Time is very well spent figuring out the best way for you to manage your own portfolio. If you chose to hire someone then it is worthwhile to make sure you really understand what the manager is trying to do and make sure you can live with it.
8 comments:
if I need to reject 5 or 10 stocks I review for every one I buy, then I need to review 200 to 400 stocks to get a portfolio of 40 stocks. I lean towards etfs.
you have to? who told you you have to? maybe they'll reconsider?
the context can also be top down
Roger
I completely agree with you in regards to "figure out what to avoid". This avoidance combined with good selection makes all the difference.
There are so many stocks out there. For the life of me I cannot figure out why people would have the remotest interest in owning or purchasing some of them, but they do.
I always focus on the what I believe are the strongest or dependable in their sectors and fill in the gaps with an ETF if need be. In some instances I would only use an ETF, i.e., if I had any hesitation or question that might arise on a stock(s) that specific sector.
I would not consider putting cash into a stock or ETF, that I felt was trending down. I look to find the opportunities in sectors that are bottoming and are likely to improve in the relative future.
I do know many that make choices like the proverbial "monkey" throwing darts at the board"
fail to look at the big picture and wonder why they have sub par portfolio performance.
Jim, many people cannot resist a good story--they all have good stories.
Also people often believe they know something no one else does. Sometimes they do but not always of course.
If M2 and MZM keep going up like they have recently, get ready for a spectacular 4th quarter in stocks.
Wow! I have my hands full with 15-20 stocks. I can't imagine how the "average investor" can handle 50-60. And by "average investor" I assume a person who does not invest for a living and is not able to follow his stocks on a day-to-day basis. I don't think you really need more than 20 stocks to have a diversified portfolio.
drive on, that is pretty much the opposite of what I said.
Some people can easily accommodate 50 or 60 but not most people. Please reread the post if you are not clear (and if you want to be clear).
I own around 100 stocks and funds, and I don't consider myself exceptional. I don't keep track of all of them on a daily basis, but I can tell pretty much what any one of them is doing just from the overall news. They are mostly concentrated in a few sectors (and then selected by things like beta and mkt cap), so that makes things easier. In any case it's not the daunting challenge that people would think. But if you're the type that has to read every news story and report on a company I wouldn't recommend it.
Rich
Post a Comment