How many investments should be in your portfolio? Like many things, our view is that it’s a very personal decision and a lot depends on your investment philosophy and the amount of time and capital you have available. Here’s a few things to think about when considering how to put together your own portfolio.
All investments are not created equal
When looking at any investment, the first thing to understand is what you’re getting access to. What will you own, as a result of making that investment?
An investment can be a single stock, property or bond. In each case, you’re getting access to one specific asset, in one specific asset class. It may be high risk or low risk. The success of that investment is likely to depend upon a very small number of specific factors.
Investing in a managed fund, including an LIC or an ETF, most often provides access to a ready-made portfolio of underlying investments, chosen by a professional manager. The investments are usually selected from within a single asset class, such as Australian or international shares. In theory at least, this provides much more diversification than a single stock. From your point of view, you’re making a single investment into the fund, but you’re getting access to a much wider range of underlying investments. This is likely to mean this investment is likely to be less risky than a single investment in the same asset class.
Finally, industry or retail super funds and some managed funds can provide access to a vast range of assets, managers and investment styles. In this case, you’re perhaps getting exposure to many different underlying managers and hundreds or even thousands of individual investments through this one vehicle.
You will also have personal preferences. You may be more comfortable with property rather than shares for example. That doesn’t mean you shouldn’t have any shares in your portfolio. But the proportion of property to shares is likely to be higher.
How “hands on” do you want to be?
You may take a minimalist approach to investing, spending as little time as possible and letting compounding do its work. In this case, a single or very small number of well-diversified investments may be all you need. It’s best to ensure that you spend your time gaining a deep understanding of the small number investments you choose. How do they work? Do they reflect your investment aims and philosophy? What are the fees? How have they performed (in both good times and bad times)?
At the other end of the scale, you may prefer to be a very active investor, spending time on your portfolio weekly or even daily. In this case, just be sure you have the time to appropriately monitor the investments you have. Many of our investors have a mix of a direct portfolio of companies and/or properties that they manage themselves, combined with some managed funds or other investments managed by professionals. If this is your approach, it may be a good idea to play to your strengths. Choose your direct investments in areas you feel are within your circle of competence. Use professional managers to access other types of investments where you may feel less knowledgeable or where it’s harder to invest directly. For example, many investors manage a portfolio of larger ASX listed stocks themselves, while accessing other areas such as global stocks, smaller companies or direct property through managed funds.
How much do you have to invest?
With a smaller investment amount, you’re likely to find it harder to spread that money over a large number of investments cost effectively. Investing in a diversified product such as the Affluence Investment Fund can help you achieve this, while you build your capital up and learn more about investing. Such investments can also be a good way to teach your children or grandchildren about investing. Over time, as investment capital grows the portfolio can be expanded and investments can be added.
Focusing on investment size rather than number
Rather than hard rules around how many investments are in your portfolio, perhaps an easier way to think about it is to ask for each investment you make, “How much of my money am I prepared to risk on this?” The answer is certainly not the same for every investment in your portfolio. And thus, not every investment should have the same size weighing in your portfolio.
You may be able to come up with a small list of factors to help you. You should take into account not only the expected returns, but also the range of possible returns. For example, speculative investments may have a chance of making very high returns, but also a high degree of uncertainty and the potential for large losses. You may only wish to allocate a very small amount of capital to an investment like this. For a managed fund or share investment, how well you know and trust the managers is an important factor.
A little about risk
Regardless of how many investments are in your portfolio, the most important question to answer is how much risk are you taking? Or more importantly, does the amount of risk you’re taking match your risk appetite? Risk appetites can and frequently do change throughout people’s lives. Generally, the older you are, the more risk averse you are. This makes sense. As you get older, the value of your investments has probably grown. You have more to lose, and less time to recover from a negative shock – particularly if you’ve already retired. The focus shifts from wealth building, to wealth preservation. As a result, you might hold more investments in your portfolio as you get older.
How we do it – the Affluence Investment Fund portfolio
Our Affluence Investment Fund portfolio is designed to provide access to a wide range of different funds, asset classes and investment strategies. We began with an expectation that it would include 15-25 investments in underlying funds. But we continued to identify a large range of very good managers to invest with. And we continued to expand our portfolio, so long as each new fund was adding value and was different to others already in the portfolio. We now have around 30 managed funds in the Affluence Investment Fund portfolio. That’s more than we expected when we started. These extra investments have not added significant extra returns. But they have helped in improving the consistency of returns, which is just as valuable.
Summing up
Ultimately, the right number of investments in your portfolio can only be determined by you. If you’re near the start of your investment journey, learning the craft, have little time to devote to investing or have an aggressive risk profile, you may have very few investments. As you age, and your capital grows, you may look to increase the number in your portfolio significantly. This can help improve diversification and reduce risk. This may mean you have 20-30 investments for you (and your advisors) to manage.
Like anything, you must strike a balance between the number of investments, the workload required to monitor them and the benefits of diversification. Monitoring investments can be time consuming. At some point, the return or diversification benefits from adding an additional investment may not be worth the time and effort. Regardless of the number of investments in your portfolio, you should regularly assess whether each one is doing their job, and the weighting is appropriate for your goals.
Take care and all the best with your investing.
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