Should I Diversify or Consolidate?

[prawn_86]

Ok, since the trading week is over, i have a question to ponder over the weekend.

I have been trading for nearly a year, and am fairly confident. I have just over 7k portfolio (only a student) and my question is this:

As my portfolio grows, ie through gains or as i add to it (i usually add 2k a yr), should i continue to spread out across different stocks or should i consolidate my positions in current stocks?

I know that a smaller portfolio is easier to manage but i love analysisng other stocks, and feel that it is a shame to not be in ones that i believe have real potential. so its not really a matter of protecting myself, more a matter of being exposed to more opportunities. although buying and holding small parcel sizes can be frustrating getting small returns.

Its a tough one and i usually hold with a mid - long term view just so you know.

 

[Morgan]

Good work Prawn on becoming an investor at such a young age.
I have been investing for around 18 years now and the market still teaches me a lesson or two every day.

Analysing stocks is a great thing for gaining understanding as to how various companies work. Don't feel bad that you may not be able to invest in all of those that you would like to. With a small fixed amount to invest, just remember that a 10% gain in 5 stocks is still the same amount in monetary terms as a 10% gain in 10 stocks.

Diversification can protect you somewhat should one of your investments go bad- and that can happen- I once lost all my investment in a gold miner (SGW). However too much diversification can cause your brokerage costs to eat into profits if you are regularly buying and selling.

A good way to easily gain a broader exposure is through some of the Listed Investment Companies that trade on ASX. ARG and AFI give exposure to many big companies while if you like resources, GMI (big resource companies) and LRF (smaller resource companies) can give you exposure there. These listed funds will also pay you a dividend, which many small companies will not, plus the spread of their investments protects somewhat against an individual company going bad.

That said, striving for diversification has actually worked against me during my trading career. Originally I was only invested in BHP (though an employee share plan). That was in the midst of the period in the nineties before the "China Story" when no-one was interested in resource stocks. I sold off my BHP over the years to pay off the house and diversify into other stocks etc. In hindsight, if I had just ignored my investment and hung onto those BHP, I would now have far and away more money than from years of trading all those other stocks!!:

 

[2020hindsight]

and my question is this:

As my portfolio grows, ie through gains or as i add to it (i usually add 2k a yr), should i continue to spread out across different stocks or should i consolidate my positions in current stocks?

cant help with the answer prawn - but I'm starting to think that the safest way to make money is to charge for advice given without responsibility lol - become a stockbroker, and "stocktake" from everyone else .

But my own opinion is to take the following imaginary trip back in time - (as if this is possible) - go back 12 months, put your mind in the mindset you had then, together with the then-current state of the world, what was happening at the time, apply your "trial theories" then - see how rich you would be today

Sorry mate I'm usually accused of being flippant - just that I see the whole damned game as gambling - and the good news is that "you don;t have to be a genius to make money in a bull market" as someone said around here.

I think I'm about to learn some new quotes on that score lol. "and ??? - so ?? what happens in a bear market? lol)

PS I compliment WayneL on the timing of "refreshing" the thread about "plotting the crash" or one of those anyway.

Like Hamlet, I just wish I'd acted instead of just thought about acting lol.
"Hark a piston shot!!, Hark a postol ****!... ahhh - never wanted to be an actor anyway..."

Good luck with your final decision - please ignore my advice ( if I have accidentally given any lol)

PS Just to really torture myself, whenever I make a few changes to my portfolio, I continue to plot the imaginary growth of both actual and previous - wow I'd be rich if I'd stopped researching !

 

[tech/a]

Prawn.
With $7k you have limited options.
Just plug away at a better than market return until a larger capital base opens up those opportunities in Asset diversification and or better use of capital---which you seek.

 

[Uncle Festivus]

In this current market, ask yourself the question 'can I afford to lose the lot?'
If not consolidate to cash until a better opportunity arises - you have to be selective with only 7k.

 

[marklar]

Difficult to say what is right for you, as really only you can know that. $7k probably isn't a large amount of money to most of the people here, but we all have to start somewhere Keep in mind brokerage costs, 'cos they do add up if you're moving in and out of small parcels.

Personally I've kept to about 10 stocks, and am looking to maintain diversification across at least 3 industry sectors, but I'm working with around $20k.

m.

 

[prawn_86]

In this current market, ask yourself the question 'can I afford to lose the lot?'

Yes.
that was one thing i made sure of when i first began investing. Sure it would be a blow if i did suddenly lose the lot, but it would not dramatically affect me. My risk:reward prfoile is fairly high due to my age and i would rather have an active contribution in how much moeny i make rather than have it in a 'stagnant' bank account.

 

[Wysiwyg]

I`ve always seen diversification as an equalising of profits and losses.Like you make a profit on one stock and others drag it down.What is the point in this?Surely having more exposure to risk with a greater number of holdings is going to result in an equalisation of profits and losses.
I think 3 or 4 holdings is ideal because of a) less portfolio exposure to the equalising effect and b) higher percentage in each holding for a higher return (higher losses have reduced risk due to less number of stock holdings)
Is there an ideal number i wonder.I have seen portfoilos with 20 or more holdings and at present i would think the losses would be compounded.Yet 3 or 4 holdings would have less impact due to the smaller percentage exposure to the market.

If you have been trading for 10 years or more, is more or less better?? (considering my point of view above about equalisation)

Thanks.

 

[cuttlefish]

Yes.
that was one thing i made sure of when i first began investing. Sure it would be a blow if i did suddenly lose the lot, but it would not dramatically affect me. My risk:reward prfoile is fairly high due to my age and i would rather have an active contribution in how much moeny i make rather than have it in a 'stagnant' bank account.

Investing on your own research at the age you're at will be giving you educational value well beyond the $7k invested, even if you do lose the lot!

I of course hope you don't lose the lot, but its also true that some of the best lessons are gained when you do lose a significant chunk of money. I'm glad that I had a couple of stocks go into receivership on me back in my earlier days - it certainly taught me the importance of detail and discipline when selecting stocks and also the importance of changing tack when the situation changes.

In relation to diversification - I'm of the opinion that if you are diversifying too much then your selection criteria are possibly getting too lax (or you've found a very undervalued sector and need to identify the premium quality amongst it - this is where the qualitative as well as quantitative factors can really maximise returns) - though with $7k the scope for diversification is pretty limited anyway.

 

[MRC & Co]

I personally would not diversify with such a small portfolio. You will be KILLED just by brokerage!

Maybe 2 stocks.

I also, do not overly diversify. I do to some extent, but definately weight my portfolio to the areas I see as the current trend.

For example, at the start of the credit crunch, why on earth would I want to be in a bank just for the sake of diversification? Further, why would I want to be in property at the moment? Just some reasons why I see "sound" diversification as complete rubbish. I would rather place stops, sit in cash (in this current environment), to limit my risk, rather than "diversification". I think too many diversify for the point of diversifying!

Maybe Im wrong! Who knows, but for now, Im very very glad with my decisions.