The quote in question;
In general, this portfolio seems to have a lot of “moving parts,” i.e. a number of individual allocations at very small percentages. I do not see a lot of value in a 1%-2% allocation to something.
First I need to disclaim that I did not have time to read the entire article. I am responding to the quote which I did find. Apparently someone sent in his portfolio, maybe for a second opinion.
The quote picked up by the reader seems to be Geoff's opinion/response to the fact that the portfolio has 1% positions in Anglo American (AAUK) which I own personally and for some clients and Agnico Eagle (AEM) and 2% positions in Devon Energy (DVN) and Energy Transfer (ETP).
I guess I don't agree with Geoff on this in general terms. I will say 1%-2% becomes impractical for accounts below some dollar amount because of commission expense but for the sake of this post, from here forward assume the account is sufficiently large enough to accommodate 1% or 2%.
Very rarely do I go below 2% but sometimes I do, the Vietnam Opportunity Fund is one such example, but 2% is a very normal allocation for me. Just about every holding is either 2% or 3% to start out. Somewhere around 40 holdings is a comfortable number for me but I would say my ownership universe is closer to 65.
Of course this is my job. I am not saying you should have 40 stocks weighted the way I do. More on that in a moment.
I can envision a scenario where it makes sense for some positions to be less than 1%. The materials sector is a tiny piece of the S&P 500 but there are some interesting exposures offered within the sector (IMO, anyway). An account with $2 million in equities and a 5% allocation to materials may not want to split $100,000 with $40,000 in a Brazilian mining company and $60,000 in a chemical stock, for example.
The idea that not much value can be realized from a 1% position is not how I view the world. That it is not practical for most do-it-yourselfers is more than reasonable. Realistically most folks will not want to allocate as little as 4% to one holding and that is where it gets very subjective.
Obviously I think my way is the greatest in all the land (how ya doin'?) but you need to work within your limits of time and skill in constructing your own portfolio.
I imagine a few of you are at the point where you have what you think is a fine portfolio of various funds but you want to expand your horizons and buy a stock, a reasonable scenario. How much are going to allocate to an individual stock in this scenario? One thing is certain; if you allocate 2% to your first stock pick and it goes to zero you will not have done any long term damage to you portfolio.
3 comments:
As a fellow money manager, in my clients portfolio diversification is key. Ive yet to have between 0 and 5% allocated to a specific sector, you put your money where your beliefs are. One needs to have alteast 5% in a sector. However, I do hold individual securities in amounts less than 5% within a sector. Gold for example, my core holding is GLD but I will buy GDX, etc with say 2% of the portfolio. In my own personal account I have not purchased an investment that did not make up ateast 10% (I only have up to 10 holding at any one time) of the portfolio, I must watch it like a hawk, but, my money is where my beliefs are.
are you bottom up?
utils, telecom and materials are all 3% of the SPX. How much do you weight to them?
My standard allocation to individual stocks (not a CEF) is 1.5% of net worth. I don't have many such investments. Mostly I am in funds of the mutual or CEF version for the investment part of my portfolio. I've had a few firms go bankrupt on me in the past and don't want to lose too much if it happens in the future.
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