Published: Dec 11, 2024

By: Benj Gallander

What does one do when looking at their stock portfolio and realizing that there are too many companies? Buying too many stocks is an easy trap to fall into. Benj has been thinking about this as he recognizes his own portfolio is far more stock-heavy than he ever imagined. It just seemed to creep up over time. And because most of his buying is done in December, it is likely that there will be another three to six additions soon. When is it too much? And what to do about it?

One buys different kinds of securities for different reasons. For example, preferred stocks play a very different role than common stocks. Canadian versus American or overseas enterprises offers geographical diversification. Portfolio diversification is very important but as Benj wrote in one of his best-selling books, “One must be aware of the devil of overdiversification.” Owning too few investments can be risky, but having too many in the collection can mean that many work against each other, thereby lowering returns. This point is not considered enough as stockbrokers and mutual fund managers stress the importance of expanding one’s stock horizons.

There are a lot of theories about forming a portfolio. First, of course, it depends on how much a person has to invest. If one simply does not have the lucre, balance is difficult to achieve. But once one does, the situation can change significantly.

Consider ETFs and mutual funds. The number of companies in these can vary dramatically. Some might have only a few securities, but others can have thousands. When people are doing their research, it is worthwhile noting the number of positions. Be ready to say “no” to your adviser if the number of stocks in any given fund seems excessive.

From our angle, 20 to 40 stocks (outside of ETFs or mutual funds) can represent a reasonably balanced portfolio. This assumes one is not concentrating too much in one or two sectors. That is more likely when certain segments are thriving. And an individual should be willing to reallocate if one area has done exceptionally well and seems to be approaching or surpassing what seems like full value.

That being said, when Ben invests, he apportions about two-thirdsof his capital to his best ideas. When these work out as anticipated, they really accelerate the snowball.

As for the bottom third of his choices, he doesn’t much care how many there are, feeling that a few more or less does not make much of a difference. He does not mind letting time pass and letting the wannabes percolate. If they show signs of being a good winner, more could be picked up to increase their impact.

One thing that we strive for in our stock portfolios is to make sure that dividend stocks are well represented. This helps to ensure that even if markets do poorly, there will still be some financial return.

Also, when “resetting” to a more reasonable number of companies, it is wise to do it gradually. This is definitely an example of a process that should not be rushed.

A cautionary warning accompanying the returns of mutual fund and ETFs is normally something like, “Past performance is not always an indication of future performance” Quite simply, in most cases, it is not. And it is fair to say that often the ones that perform best for a few years will then gravitate toward the bottom of the pack.

Just as with building a house, a portfolio is not built in a day. It must be attended to with shares carefully added and nurtured. It is wise to look it over quarterly and see what variations should be made, if any. Avoid haste. This is indeed a long-term exercise where the best results are relatively slow and sure.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter