When Is My Investment Portfolio Diverse Enough

As many of you know, I’m a keen investor, always ready to discuss my experiences and learnings with you all. A question that keeps popping up continuously is about portfolio diversification: Is my Investment Portfolio diverse enough? And how do I manage it?

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1. Knowing My Comfort Zone

One thing I’ve learned from my years of investing is the importance of understanding your comfort zone. My golden rule? No single stock should make up more than 15% of my total portfolio. Any more than that, and my peace of mind takes a hit. It’s like eating spicy food – a little kick is good, but too much can upset your stomach! That percentage may be different for each of you – something you should think about.

2. Quantity and Quality: Striking the Balance

So, how many stocks should one hold? At StockFit, we generally advise holding a minimum of 15 to 20 stocks for adequate diversification. My personal portfolio? It usually oscillates between 40 and 60 companies. Sure, it’s a bit on the higher side, and yes, it does require a considerable amount of my time. But the thrill of being closely involved with the journey of these businesses makes it worth it for me. I’m also doing a lot of research and spend a considerable time on the topic. That is not the same for most investors.

Since I also invest into my winners, the losers of my portfolio eventually become so small in terms of their percentage. Eventually I do a cleanup by selling some of the long-time losers if my initial investment thesis is broken. Related to that, we have an interesting post about when to sell a stock.

3. My Preferred Asset Class: Stocks

There’s no shortage of asset classes to choose from when building an investment portfolio. Bonds, commodities, ETFs, index funds, real estate, and even cryptocurrencies are all viable options for an investor. Each of these asset classes brings something different to the table – be it stability, high returns, hedge against inflation, or even just some good old diversification.

Now, as an investor, I’m not blind to the potential of these other asset classes, but I’ve always found myself particularly drawn to stocks. It’s not just the potential for higher returns that lures me, though that’s certainly part of it. Investing in stocks for me is akin to embarking on a thrilling expedition, each company a new adventure.

When I invest in a company’s stock, I’m buying a piece of that business. I get to participate in its journey, its ups and downs, its successes and failures. The reward for me is not just in the financial gains, but in being part of the story of the companies I invest in. I get to understand their strategies, study their competition, and watch how they perform in different market scenarios. In essence, investing in stocks offers me a level of engagement that I really enjoy.

That being said, while stocks are my asset class of choice, it’s important to remember that a truly diversified portfolio will often include a mix of different asset classes. Bonds, ETFs, and index funds, for instance, can offer stability and mitigate the risk inherent in stock investing. Real estate and commodities can offer a hedge against inflation, and the highly volatile cryptocurrencies can potentially offer outsized returns.

So, while I may spend most of my time hunting for promising stocks, I’m well aware of the importance of the other asset classes, and I do try to incorporate them into my investment strategy to a certain extent. After all, a well-diversified portfolio is the best defense against market volatility.

4. Making the Most of Investment Tools

Over the years, I’ve found it beneficial to use multiple investment apps and segregate my investments into different baskets based on various themes. It’s like organizing a library – easier to find what you’re looking for and keep track of everything! Every app comes with different ways to invest and how to track them. They all have their specific pros and cons. That does not mean you have to make things more complicated than it needs to be! If you are just starting out, take any one of the apps that are out there.

Recently I’ve published a personal review about M1 Finance that you might be interested to read:

• M1 Finance Review (and how I use it)

5. Mapping Geographic Risks

In our interconnected world, I’ve learned not to overlook the importance of geographic risks. It’s not just about spreading investments across sectors; ensuring a good mix of domestic and international exposure acts as a safety net against potential regional economic downturns.

6. Tackling Sector Bias

Despite my best efforts, I must confess that I currently have a pronounced overexposure to the technology sector. As a tech professional, I naturally gravitate towards what I know best. However, I am conscious of the need to overcome this bias and diversify more broadly.

In essence, my diversified portfolio includes 40-60 companies, each accounting for no more than 15% of the total. I lean towards stocks, organize my investments based on themes, and have a balanced geographic exposure. My portfolio may be tech-heavy now, but I’m working on rebalancing that.

Remember, your investment journey should be as unique as you are. Just like there’s no one-size-fits-all outfit, there’s no universally ideal portfolio either. Portfolio diversification is about achieving a balance that aligns with your goals, risk tolerance, and investment horizon. This requires regular review and tweaks. For more help on your journey, head over to our Personal Finance Center to learn more! It is packed with a lot of in depth knowledge that can help you reach your financial goals.

As always, it’s wise to consult a financial advisor before making any major changes to your investment strategy.