Wednesday, August 5, 2015

Portfolio Building - part 2, Diversification

Dividend Growth Stock Blog

A couple of weeks ago, I had a good discussion with investinginautism on the subject of diversification. You should check out his blog. 
Be careful with his questions - he is a teacher :)

My response was to diversify as much as you can. 

“Wide diversification is only required when investors do not understand what they are doing.” Warren Buffett

I guess to applies to me :)




Diversify away!

My philosophy is to diversify from 30 to 50 high quality dividend paying companies. The reason is to reduce risk via diversification. But this is at the expense of more fees and more maintenance. 

What if I don't have time...?

However, the thing about investing is that there is no one answer for everyone. 

You need to consider the manageability of your portfolio. 

While Dividend growth investing is not rocket science, it needs to be monitored and managed. It takes time (but not long in my opinion.) Fees can also be managed with low cost brokers etc. 

Even if you find a good set of companies today, after 20-40 years, your portfolio will look completely different due to spin offs, mergers etc (Eg see Nifty fifty companies).


If you don't have the time (or you want be be totally passive) to manage your portfolio then things must be kept simple. 

DGI investing is still possible. However, your portfolio cannot be too large such that it is unmanageable (or too much time). But not too small such that it takes on too much risk. 

You must also be clear on your buy/sell strategy considering that the portfolio will change.

Otherwise, for 100% passive investing, another option  is go with a market wide index - lowest cost one that you can find.

There is a nice paper which discusses the risk profiles based on different numbers of companies http://www.aaii.com/journal/article/how-many-stocks-do-you-need-to-be-diversified-.touch

What's the best option?

It depends on a lot of things. 1) risk tolerance 2) how active you will be managing the portfolio. 3) Your investing style - whether you are buying and holding 4) Fees etc. 

In other words, no single answer. Different strokes for different folks. 

For me, I will invest 30-50 high quality dividend paying companies. 

Clearly, I don't know what I am doing...

D4s

2 comments:

  1. D4s - enjoyed the article! Glad to know that I am not the only one that is diversifying without a clue! Thanks for taking the time to keep the posts rolling!

    Andy

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    1. Thanks Andy. I'm glad you enjoyed the article. I think diversification is a wonderful thing. The impact I see with my BAX/BXLT has been greatly reduced since I have other dividend stocks holding up the fort. So, good to be "clueless".
      D4s

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