Why is Diversity Good?
What are the Advantages of holding fewer Positions?
Conclusion - Current Answers to the ‘Am I Diversified too much?’ question
Having written this Series of Blogs and thought quite a lot about this precise question, I am coming round to the idea that I am perhaps a little bit too diversified. My previous intent to get down to the WD40 - i.e. to hold 40 Stocks in my Trading ISA Portfolio rather than the current 45 or so, is still in train and I am slowly, slowly, getting the number down. It is not easy because I do not want to sell great Stocks too early just to meet my WD40 Rule - especially at the moment when we are in the most Bullish part of the Year (ok, it might not feel like it this week !!) and I want to maximise my Gains over these last few Weeks. In the past probably the Number 1 Mistake I have made over and over is to sell Great Stocks way too early - I cannot stress enough how the Power of Upwards Momentum can drive even an apparently overvalued Stock on to extremely high levels - there is no point in missing out on this if you can stay in the Trade. Another Free Dinner.
Despite having a lot of Stocks, in practice, due to running and adding to Winners, I am Overweight on a number of Stocks and Underweight many others where they have not worked out as planned (yet). These effects mean that even though I have 45 Stocks, it is probably the case that 20 of them really make the difference to my Returns and some have very little impact - for instance, I only have about 0.75% of my Portfolio Exposure in Cello CLL so it has very little impact, whatever it does (this is prime candidate for getting ditched soon). However, my Tristel TSTL Weighting is probably around 5% so this has a big impact - much of it from the superb run up in the Share Price since I bought in. It is worth realising that in effect my Number of Holdings is not at all Static and it changes a lot even over fairly short periods of time.
My Income Portfolio is fine and I don’t need to do anything to it at this point. Maybe in the distant future when it grows in size I might need to go to a couple more Stocks - maybe up to 15 but I see no reason to hold any more than this. I want the WD Income Portfolio to be pretty much almost no effort and almost no activity - it is very much what I see as ‘Passive Investing’. Yawn.
If there is an Over Diversification problem it is in my Unit Trusts and it is probably here that I will take action. I am particularly frustrated this year because the Portfolios I manage myself are massively outperforming all of the Unit Trusts - and I get Divvys as well. I am tempted to ditch the European Unit Trust - I am not really sure what this is giving me - Europe Stocks are pretty much highly correlated to US Stocks and UK Stocks so it is all doing the same job really. Despite what I will go on to say in the next paragraph, I can’t help thinking Europe is a sclerotic Economy in terminal decline and a bigger fear is that the Euro could weaken against the Quid which would adversely impact my Returns going forward.
I am sure I have mentioned this before but I am of the view that Funds are best used to get exposure to a particular Theme or Sector (like I do on my Tech and Health Funds) but I am not convinced they are much use for exposure to Geographies / Countries - this is because the Economic Performance of Individual Countries is pretty much impossible to predict and because GDP and Stockmarket Returns are not related as people think. My current thinking is that Geographic Funds work only as a Basket where you use regular Rebalancing (probably once a year) and it is almost like gambling because you are just assuming that Stockmarket Trends for ever rising Indexes over time are going to continue - there is a lot of hope in this way of Investing and it is far Riskier than People realise. Anyone Investing in this way just before the Bubble Burst in 2008 will have felt the Risk very acutely, and would have no Downside Protection (apart from perhaps the odd Bond Fund which might have offset a little bit of their Loss). I am sure this is a topic I will be revisiting over time.
Something that I have been thinking a lot about lately is to take on more Leverage in my Spreadbet Account. Something I have learned this year is that my FTSE100 Hedging activities do work pretty well and saved my backside on August 24th 2015 when we had the horrible falls of ‘Black China Monday’. I am seriously thinking of increasing my Spreadbet total Long Exposure by as much as 25% more or even 50% more - this would be a big increase and potentially risky but it would still only be around a third of my Total Wealth. It’s a difficult one and I will not rush blindly into it - but shifting some Capital from my European Unit Trusts to use as Buffer in my Spreadbet Account to enable more Leverage would make sense.
I wrote the Paragraph above some weeks ago and I am typing this bit on Wednesday 9th December 2015 - just after 2 pretty tough Weeks on the Markets with some nasty falls. Funny how such Market behaviour impacts my thinking and emotions and I am now wondering if increasing my Spreadbet Exposure is quite so wise - when things are going swimmingly and your Accounts are rising in value nicely, it is just so very easy to forget how quickly the Black Swans can come flocking in and how things can turn Ugly extremely fast - if Over-leveraged, this would cause big problems. This is making me think that perhaps I could increase my Leverage by another 25% on Exposure over the course of 2016 but to just go mad and add 25% on January 1st 2016 would be a bit reckless. In addition, adding 50% more really is overdoing it I suspect.
For now, I am thinking I will sell my European Unit Trust completely, and take the Cash out to support a bit more Leverage if I want it and no doubt I can always spend Cash down the Pub.
I will continue to mull this over and when I do my Trading Plan / Rules Document for 2016 I will amend as I decide.
Lots of thinking still to do then, cheers, WD
Links to related WheelieBlogs:
My Spreadbetting Approach (this last part contains links to the earlier parts):
My Averaging Down Blog can be found here:
The Compounding Blog is here:
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