Interesting Comment

As some of you may know I drive to Phoenix two days a week to work at our firm's office. I have given up on listening to Kudlow's show and have never been a fan of Cramer's show so I listen to music instead.

On my way back home yesterday as I was switching CDs I heard Cramer make a comment that I thought would make for a good post. He was talking about John Roberts' portfolio which is apparently public information. According to what I heard, the judge has 37 stocks which Cramer feels is too many. Cramer said he has a research staff and even so only has time for 25 stocks.

I think this is a multi faceted issue. I work more than full time maintaining 40-45 stocks and devoting different levels of monitoring to a whole bunch of other stocks.

I have to think that Cramer spends more time on his media obligations than most people in the business so obviously he would be able to closely follow a lot more than 25 stocks without his TV and radio work.

The number of individual stocks any one investor can effectively monitor is totally subjective. Over the months that I have been writing I have had email from people doubting their ability to monitor even a half dozen stocks and so will only use funds. If you look at some of the trading oriented blogs out there you will see that some folks are able to very closely monitor a lot of names, certainly more than I could ever watch (various screening tools probably help these guys, but nonetheless...).

Obviously I believe in using individual stocks where possible. Most accounts I manage have 40-45 stock holdings. There are several ideas behind that type of number. I think within most sectors it is very difficult to capture the full effect of those sectors with just two or three stocks. Also if you have 5% in one stock you are taking a fair bit of single stock risk too. A good example is healthcare. It makes up about 15% of the SPX. There are so many sub sectors in health that I would feel very under exposed with just two or three names. Also it gets even harder when you start to think about how to add in foreign exposure, different cap sizes, different types of volatility, style and so on.

Clearly, thinking about all of these different things and building a portfolio to address all of them is not something that everyone will want to do or have time to do. This is where do-it-yourselfers can employ various tools to blend together a properly diversified portfolio.

Here are a couple of examples of what I mean. First with the financial sector; (a little bit of repeat here) financials make up 20% of the SPX and I have been maintaining about a 15% weight for clients for quite a while. According to the Yahoo Finance search there are five financial sector ETFs. So in building this sector for your portfolio you could buy one of these ETFs and be done. Of course you would be missing out on several aspects of the diversification. For folks willing to take it a little further you could weave together several tools to comprise the sector.

Let's say you want 15% of a $400,000 portfolio to be in financials, don't want six different stocks but do want some real diversification. 15% of $400,000 is $60,000 in financials. DVY has about a 35% weight in the sector. Buying 1000 shares of DVY at $65 gives you $22750 (out of the $60,000 you are looking for) in domestic financials. From there, if you want Australian exposure you could by 1100 iShares Australia (EWA) at $18.30. This would give a 5% weight to down under (about what I have for clients). EWA has about a 37% in financials would account for $7400 more to the sector for this portfolio. I have written several times about iShares Austria (EWO) as low impact way to invest in central and eastern Europe. EWO is 23% financials. 300 shares at $26 would be a 2% in the portfolio and about $1900 worth of financials.

So at this point you have three positions, more than half of the exposure you want for financials, no single stock risk, Australia has been captured (commodity based diversification) as has emerging Europe (in my opinion) and you have a very nice yield.

From here you could add a financial sector ETF (keep tabs on the overlap with DVY) and maybe pick two stocks to fill in gaps you think are missing. Here I am thinking an Irish bank stock, but if you don't want an individual stock but like Ireland there is always the Irish Investment Fund (IRL), a CEF, which has a 20% weight in financials.

Now let's look at the energy sector. Energy is about 8% of the SPX. Lets say you want 10% in energy, which would be $40,000. 19% of DVY is energy. Since you bought 1000 shares of DVY you have $12,350 in energy. EWO has 18% in energy which is $2350 worth. EWA is 4% energy or $800. This totals about $16000 in energy or 40% of what you want to hold. Yahoo Finance knows four energy ETFs. Perhaps it would make sense to by one of the domestic ETFs with another $16000 (4% of the entire portfolio) and with the remaining $8000 buy a big, foreign integrated oil company to pick up some yield (the way this has gone I am thinking Norway but any foreign company would probably work).

This type of construction can be done for every sector. Hopefully it is clear that this approach could include as few or as many individual stocks as anyone is comfortable holding.

Also keep in mind that if you put 2% into a stock and you get it wrong in a bad way you will not damage your financial future.

This exercise was just an example of what can be done with ETFs and not a specific recommendation. I would also suggest spending more than the ten minutes I spent getting to this point, as I see some gaps already. This is just an attempt to get people to think in different terms. I should disclose I own DVY, EWA and EWO. Some clients also own these three as well.

I don't think this type of work is beyond most do-it-yourselfers, its just that no one ever writes about ETFs this way.