This paraphrases a question from a reader about my 2%-3% comment as a suggested exposure to China. The reader, very reasonably, points out that some people don't want to have to keep track of too many holdings and the reader opens the door to 5%-10% positions instead. This is a good question.
China is volatile. The more exposure you have to China the more volatile your account will be. As I read the question, the reader would be more comfortable only tracking 10-20 holdings (I base this on his 5%-10% comment). Let's say that this reader has 70% of his equity portfolio in domestic stocks and 30% in foreign. Isn't it possible that the entire domestic allocation could be covered in four or five ETFs? Perhaps the domestic could be as follows.
S&P 500 (IVV) 30%
Dividend ETF (DVY) 20%
Small Cap Value (IJS) 15%
Energy ETF (XLE) 5%
That leaves 30% of the portfolio that could be sliced up into as many as (based on the readers comment) 16 holdings.
I have no accounts that look like what I have above nor would I suggest that allocation as a first choice to anyone but it makes a point. If you can manage a dozen holdings, one of the dozen could be 25% of the account and another could be as little as 2%.
If you are not going to use individual stocks, which is perfectly OK, I would advise that you drop the notion that things should be equal weight in the portfolio. Ten holdings does not mean everything at 10% of the account.
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2 comments:
Several months ago you suggested a simple etf portfolio:
40% rsp - rydex s&p500 equal weight
30% dvy - ishares dividend select
20% powershares pid - intl. dividend achievers
10% any emerging market etfs
I laid this on at the Investopedia Stock Market Simulator using EWC for the emerging market etf, at what I judged to be an inopportune time in Jan. when the market was seriously overbought.
This portfolio has performed quite creditably though; the $100K simulated funds invested have grown to $103,032.79, and this passive portfolio has risen to place number 47063 out of 85811 entered in the competition!
Roger,
Your answer was much better than the question (mine). But in spite of your good answer I am rather reluctant to increase my tracking of assets by putting 2-3% in a particular security.
I concede you are correct on this one. I also admit that I am likely to have 50 - 65% in 3 or 4 core holdings. Still I would prefer to keep tracking simpler and invest 5 to 10% of my portfolio in any one investment.
While I am willing to sort through hundreds of recommendations I really only adopt a few. 10 to 15 and fewer may even be better. I am not trying to disagree with you as much as present a point of view of many small investors. I really do not know a lot of small investors with lots of 2 - 3% allocations in their portfolio. I do know a lot with 3 to 8 holdings.
These are good reasons for ETF's and/or professional management for many individual investors.
KL
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