“Willie, can I diversify into 100 stocks?”
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“Willie, can I diversify into 100 stocks?” A participant asked me last night (btw, great question), when I hosted the Securities Investors Association (Singapore) X Dividend Titan Webinar collaboration. Oh yes, the crowd and myself had a fantastic time - so thank you SIAS! First things first, you must diversify if you’re building a dividend portfolio - no questions asked. Why? Simply because different stocks behave differently at certain periods. There will be times when a group of stocks outperform in one period - and underperforms the next. But we don’t have to invest in 100 stocks. According to research:
The thing is, diversification benefits drop as you increase the number of stocks in your portfolio. SO... If you're starting out investing, I personally recommend to aim for 25-30 stocks. That means you’re probably getting about 3-10% of your portfolio. Even if one stock suspends its dividends, the impact will be minimized. This reduces portfolio risk meaningfully without becoming unmanageable. In my years investing, I’ve heard the famous quote: “Diversification is protection against ignorance. It makes little sense if you know what you’re doing.” This assumes we’re Warren Buffett. But we’re not. In fact, as we get older, our portfolio size gets bigger, and diversification is a way for retail investors like myself to stay objective in a now crazy stock market. Of course, the reason why investors poo-poo at diversification is because many think a well-diversified portfolio doesn’t give good performance. Not true. Institutional investors have achieved this. I’ve achieved this. In 1977, Peter Lynch managed the Magellan Fund, which was owned by Fidelity. Back then, he had only $18 million in assets. However, he actually invested more than 1,000 individual stocks during his time as a fund manager. Even though he invested in a diversified portfolio from 1977 to 1990, he actually averaged 29%. Let that sink in. He had one of the best years investing - a widely diversified portfolio of different stocks and going through the different criteria. Yet he had performed well. We can never be 100% right. Even experienced investors make mistakes. The larger the portfolio size, the more important protection becomes. Do you still remember my story of the one-stock portfolio? It was a painful lesson for me. For example, if you’re starting out, you want to build a dividend portfolio diversified across different countries and well allocated across stocks... And sectors... This way, even if a tiny group of stocks blow up in your portfolio, you’re still in the game. I’ve been a student of investing. But I’ve also been an idiot and a fool. Not diversifying was one of my biggest mistakes I made in my investing career and it taught me a few things:
If you want to know more about my "one-stock" portfolio... Sometimes, investing can be simple. Willie Keng, CFA Founder, dividendtitan.com P.S. Like this issue? Click HERE to join other dividend investors reading my DT Compound Letter. I send my regular letters to your inbox. |
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