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Investing academics and holding counts

White Top View series, Portfolio Counts and Sizes, Part 2 of 6 

The academic answer

Investing academics and holding counts in multiple studies conclude 16 stocks are the ideal number, with 5% to 7% of a portfolio held in each position. The range is surprisingly narrow.

This is Part 2 in the 6 part White Top View series, Portfolio Counts and Sizes that opened with Part 1, Five Factors – how many stocks to hold.

Most academic studies suggest between 15 and 20 stocks as the best number. You and your top research assistant, Google, can find endless numbers of studies.

Endless academic studies suggest various ideal strategies. You can get blurry eyed reading such studies, if you wish. Don’t bother.

Before adopting academic conclusions in your investing plan, wait until you meet the professor who has achieved wealth by following their academic discoveries. There are many excellent and useful studies. They help us understand. But few are well adapted to producing superior results in the real world.

Investing studies and holding counts suggest 16 stocks as the ideal

Many studies conclude that the ideal
portfolio should hold 16 stocks.

The studies are academically and mathematically correct. Still they all have a huge flaw. They ignore investor psychology which always matters. Psychology is a huge factor in the market. Too often it gets ignored or neutralized in academic studies.

In my view that serious flaw renders them unrealistic and of limited value. I think the market is one place where reality and practice routinely outperform such studies. No idealistic theory that artificially limits the many factors involved can give realistic and applicable answers.

In the real world, investor psychology ranks far above the facts, particularly in short-term market behavior.

Holding 15 to 30 max

You have to feel right about how many stocks you hold in your portfolio. At times I have held over 40 positions but routinely hold less than 20. I now believe 30 is a maximum manageable count and fewer excellent positions produce significantly better results.

Holding significantly above 20 stocks quickly presents a management challenge. Be mindful that you will be very busy on the release of 20 quarterly reports! Which do you read first?

Reviewing 20 or 30 reports will remind you of a high school cramming session for multiple exams. That is not advisable. To invest well you need to know each stock. Remember, we are also considering the need to be diversified. Diversification for risk management means that we can not cluster our holdings in a handful of sectors.

Truly understanding and staying current with more than say 30 stocks can be very difficult. I am presuming you are not doing this as full-time work. In my opinion I now believe holding 30 stocks is the absolute upper limit. I think 20 or so is a better and more manageable upper guideline.

Yes there is an exception

A bottom fishing strategy, especially in resource stocks, can produce stunning returns. Using that speculative strategy demands serious homework, but does work. I have profited over many years by using that approach. Future discussion will cover speculation in resource and junior start-up stocks.

For now I will explain it as buying multiple and even several dozen small stocks. The expectation being that some will substantially gain in share price over a limited several months.

That is a high risk, high reward speciality play that can win for those that do their homework. It is not something to dabble in or for triflers.

Concluding there is more to come

At this point we have our minimum set at 5 stocks and the maximum at 30. That answers the basic count question. Next time in Part 3, Size matters in stock positions, our discussion continues with consideration of the right position size to hold.

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Have a prosperous day!

Bryan

White Top Investor
whitetop@WhiteTopInvestor.com
www.WhiteTopInvestor.com
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These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com.

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Links to all parts of the White Top View series, Portfolio Counts and Sizes:

Part 1, Five Factors – how many stocks to hold

Part 2, Investing academics and holding counts

Part 3, Size matters in stock positions

Part 4, Costs drive investor position sizes

Part 5, Portfolio portion measurements – how do you measure up?

Part 6, Investor watch lists and toe holds

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