PORTFOLIO MANAGEMENT

Investing has two main parts: the process of investing in stocks and portfolio management.

The practice of investing in stocks includes:

  • exploring the world for opportunities
  • researching possible investments
  • understanding markets and economics
  • interpreting how others are thinking and feeling

Portfolio management is:

  • containing your emotions
  • understanding your risk tolerance
  • understanding your life and financial goals
  • coordinating your portfolio with your personal finances and relationships
  • managing each stock’s allocation size/risk profile

This site mostly helps you out with the former (through articles and reports), but less so with portfolio management. This is because everyone’s risk profile and financial situation is different- a person planning to buy a house next year will obviously be more conservative than someone who isn’t; a young person can absorb greater risks and losses than someone with a family. Because of this variance, it is up to you to decide how you want to design your portfolio.

With that being said, here is how I and my colleagues tend to invest. Warning: we tend to be quite loose.

How many stocks in a portfolio?

I rarely own over 10 different stocks. On average, I’d say I own around 6. The lowest I’ve ever gone is 2.

I’m in the camp that doesn’t believe in overdiversification. If I invest in 20 stocks, there’s no way the 20th stock is as good as the 1st. Overdiversification simply dilutes the best ideas in a portfolio. Historically, the best investors became rich off a few investments.

My preferred way of diversifying is investing across different industries and countries. This way, I can reap the huge gains of my best ideas while still having protection from diversification.

There is one exception to this rule. When I speculate on junior companies (often commodity related) I may buy more than one name in the same sector. For example, when buying junior miners I may buy a few names to spread risk since they are more vulnerable to the downside due to permitting, government regulations, swinging commodity prices, operating troubles, etc. In these situations, I treat stocks in the same sector as “one holding.” I’m virtually adhering to my philosophy, though technically I can own over 10 individual stocks.

How much weight should each stock have?

I decide the percentage allocation for each stock based on its risk vs reward profile.

In general, my percent allocation limits are as follows:

  • 40% in one industry or sector
  • 33% in one “value stock” (stocks that have a large margin of safety, low risk)
  • 5% in one highly speculative stock (explosive upside in a shorter time frame, high risk)

When a stock goes down, I add so the position comes back to its original allocation size. I’m more lenient on the upside as I usually let my investment thesis play out and take profits based on how much “runway” the thesis has left, rather than selling to meet a specific allocation size.

I try to keep my trading to a minimum, but if say, an opportunity presents itself with greater upside, I am willing to scale out of other positions to “make room.”

I don’t know who said it, but this quote sums up my portfolio management philosophy: “Invest enough to make a difference, but not degrade your lifestyle.”

That’s it…

That’s the system I use to manage my portfolio. It’s simple and easy to follow. It limits the amount of trading I have to do and lets me reap the upside. Feel free to follow the same strategy.

Of course, there are many other ways to manage a portfolio. I will be writing about different portfolios in my articles over time. One of those portfolios may suit you better than what you currently manage or what I’ve presented here. In the meantime, a quick internet search will present you with different portfolio styles.

It’s important you have a grasp on portfolio management. Good portfolio management can be the difference between a great investor and a losing investor. Even if you pick the best stocks, a better portfolio manager can outperform you with mediocre stocks. So find a strategy that best suits your financial situation and stick with it!

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