Monday, September 14, 2015

Portfolio Building Part 3 - Risk

As per my previous article (portfolio building part 2), my goal is to build a diversified portfolio with dividend growth stocks.


My diversification plan is to build a portfolio with 30 companies or more to reduce risk. In my simple mind, it is quite possible even for the bluest blue chip to go bust. 

A good summary is provided at the following site.

There is not much difference between 30 and 1000 companies from a risk perspective. The article suggests that even with 4 companies, you can reduce a significant amount of risk compared with one company.

So, from a risk profile, I expect my risk (with a portfolio close to 30 companies) is similar to the S&P 500 index (with 500 companies).

A good exercise is to compare the gains/losses against the index. Per my first year report, I already plotted the gains and losses of my portfolio. See below.

When I look at the graph of the S&P 500 index, I was a bit surprised.
While my goal was not to replicate the index's performance, it seems my portfolio is behaving in a similar fashion.

Sure, in some months, I am getting slightly better  gains and in other months I am getting slightly worse losses, but overall the plots look very similar.

Does this mean I should just buy the index?

It is easy to buy the index. My 401k portfolio is primarily based on the index.

But why would you want to continue to pay the annual fees? With my DGI portfolio, I've kept my purchase fees low <0.5% and I don't have annual fees.
Also, the yield for the S&P index is around 2%. My portfolio is currently close to 3.5% which I can control. Moreover, I have the option to increase or decrease the dividend growth rate according to my strategy.

The key point is that it is also not very difficult to build a flexible portfolio to get a similar level of risk.

This highlights the importance for me to transfer over my holdings in my 401k from index funds to something I can manage. The risk profile should be similar and I can stop paying annual fees.

Start Building Your Portfolio

With appropriate knowledge, it is possible to build a portfolio that has a similar risk profile to S&P index that you have full control over.

This does take some time and planning. However, it is not rocket science. You just need to read up, and build a strategy to invest regularly on good quality dividend growth companies (30-50) at fair valuations according to your portfolio requirements.

No time?

If you don't have time and if you want to be completely passive, then stick with a market wide fund. Just make sure you find the ones with the lowest fees.

Have you compared the risk profile of your portfolio with S&P index?



  1. Investing in multiple companies is the best thing one can do whne investing to mitigate the risk. I currently own 32 in my portfolio...and there are still some gaps that need to be addressed. Will be adding more companies in the future.


  2. R2R,
    I completely agree with you. I need to add a few more companies myself. e.g. Healthcare
    However, I am surprised how close the plots are. My intention wasn't to replicate S&P 500.

  3. You hit the nail on the head - no reason to pay the fees unless you don't have the time and even then there are great resources that make it much easier for the do it yourself investor. If you had tried to replicate you wouldn't have been that close, you're just good!

    1. Dividend Chimp,
      Thanks for visiting.
      Indeed - why pay for extra fees? This question is for me also since I still use have these damn funds in my 401k!

  4. My bet is that many other bloggers' portfolios also roughly track indices....I know mine does. Are there any sectors, rather than Healthcare, that you feel are under-represented in your current holdings?

    1. Dividend in Hand,
      Healthcare is lacking in my portfolio today. I hope to correct this soon.
      I am interested to see how many companies is needed to "replicate" s&p performance.