This is a topic that I have been thinking about over the last few weeks. Sharing my thoughts for feedback.
Some background: My equity side of investments is split into mutual funds (~75%) and direct equity (~25%). I started with mutual funds. I decided to go direct for the learning, excitement and also wanting to by certain companies that were not in my mutual fund holdings.
I currently hold 23 companies in my direct portfolio. I followed the general advise to diversify and tried not to invest more than 5% in any one company. This is great for the portfolio I think, but for the overall picture it doesn’t make much sense and I might be better off with a more concentrated portfolio.
Let me explain.
- 23 companies is a lot to study! There are few in there that I haven’t checked in the last 6 months or so. Which means my averaging decisions are only based on price movements and not any fundamentals. This is not good.
- Mutual funds already bring in diversification to my overall portfolio. I don’t have to worry about portfolio concentration until my direct portfolio is dominating my equity investments. Even if one company is 50% of the direct portfolio, it will only be 12.5% of the overall portfolio. (i.e. 50% of 25%)
- One of the reasons to go direct is because I am bullish on a certain company / sector. I think I will do better if I stay true to this and focus on sectors that I am truly bullish on. Without this, the returns will always be average and comparable to mutual funds.
So my goal moving forward is to trim down the direct portfolio as and when I see a buying / selling opportunity. Probably down to 10 or 12 companies.
Looking forward to your thoughts.