# single stock allocation percentage



## blin10 (Jun 27, 2011)

everywhere I read, people recommend to only have 5% single stock allocations (not sector allocations) in your total portfolio...
my dilemma is that what if I want to buy the best companies with the best growth, there's only so many in each sector and I don't want to buy worst company just so I can say "i'm sticking to what others recommending"... for example let's say portfolio is 100,000 and i want to own 20% in pipelines, so I have 20,000 to spend on pipelines, I just want to to get top dogs PPL and IPL (i don't want to get TRP because there's less growth imo), that would be 10% single stock allocation, but I don't want to buy something of a less quality JUST for diversification purposes... or let's say in reits, i don't want to own a bunch of low cap companies, I just want few biggest with premium properties such as rei/hr ... how do you deal with this? do you strictly follow allocations targets or some stocks represent much larger allocation percentage then the others ?


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## Spudd (Oct 11, 2011)

I don't buy many individual stocks anymore but if I did, I would definitely try not to go over 5% with any of them. What about expanding your geographic horizons and getting US or overseas based stocks?


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## My Own Advisor (Sep 24, 2012)

I think BMO and KO are my biggest holdings, actually, I know they are. About 8% each, of my total portfolio. Another 8% in VTI and likely 7% in XIU. Then a bunch of individual stocks.

If I own individuals stocks...yes, definitely under 10%. No buying any more BMO. KO is DRIPping but so are VTI and XIU.


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## blin10 (Jun 27, 2011)

Spudd said:


> I don't buy many individual stocks anymore but if I did, I would definitely try not to go over 5% with any of them. What about expanding your geographic horizons and getting US or overseas based stocks?


i prefer to stick with Canada due to tax credits and not dealing with foreign exchange rates


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## Yoqui (Mar 5, 2013)

every1s situation is different, their is NOTHING wrong with having a stock being 10% of your portfolio (10% I think is actually very safe if you have done your research). Of course it all comes down to your risk tolerance. 

If you are confident about your picks than 10% is nothing, here is an article from CNBC - Jim Cramer saying you shouldn't even have more than 10 stocks in your portfolio
http://www.cnbc.com/id/100450613

But again, its situational, like if you are retiring soon or going to be needing a certain amount of cash soon...having a large percentage in stocks is just dumb


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## avrex (Nov 14, 2010)

I think it is somewhat age dependent.

At age 30, you would have a small portfolio and a longer investment time horizon. So, having 10% or more allocated to a single stock, would not be very concerning.
At age 60, having a large portfolio and shorter investment time horizon, with 10% or more allocated to a single stock, is probably not a good idea.

Personally, my largest individual stock is about 4% of my portfolio.


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## SpendLessEarnMore (Aug 7, 2013)

http://www.valuewalk.com/2013/01/prem-watsa-big-bet-on-rim-appears-to-be-paying-off/

Prem Watsa the dude that bought almost 52 million shares of Rim at around $6-$8.

There's no you must do this and that rule in buying individual stocks. It comes down to minimizing risk.


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## Toronto.gal (Jan 8, 2010)

blin10 said:


> 1. I don't want to buy *worst company* just so I can say "i'm sticking to what others recommending"...
> 2. do you strictly follow allocations targets or some stocks represent much larger allocation percentage then the others ?


*1.* What exactly do you mean by worst, valuation? 

Ignoring certain out of favour companies with solid fundamentals can be a mistake, as they can also be the ones with the best recovery/growth potential in their respective sectors, that also give a margin safety when purchased at solid discounts. 

That 5% general rule is a good one, however, for the more experienced stock-pickers, there are times when going above that, makes brilliant sense, but risky if done with poor analyses & diversification. I started buying some of my top holdings at 7% because of the initial low valuation, and some are even higher than that today [not referring to market value, but book value]. I increase/decrease the allocation based on economic/market conditions & other factors, so those %s are not set in stone & should be adjusted periodically.

*2. *Since we don't know the future, no, I do not have strict allocations and adjust when there is a need for it; and yes, definitely have stocks with larger weighting, ie: the banks. 

I think it's a mistake not to look outside of Canada.


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## humble_pie (Jun 7, 2009)

blin10 said:


> i prefer to stick with Canada due to tax credits and not dealing with foreign exchange rates



blin when it comes to canadian market i for one think it's fine to go over arbitrary 5% or even 10% limitations. Because there are not that many quality stocks in canadian stock universe & i'm assuming that somewhere, somehow, you've got some Good Old Stuff such as banks, telcos, big energy, big utility salted away for a rainy day. Most people do.

me i have 3 canadian banks. I think it's enough diversification to own 3, no need to own more. Together they form 28-38% of total portf, depending on when the picture gets taken.


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## humble_pie (Jun 7, 2009)

Toronto.gal said:


> I think it's a mistake not to look outside of Canada.



you are right ... but ... but ... i find that it's exceptionally difficult for an individual stock picker to follow stocks in overseas countries. US markets are a little easier, there are plenty ADRs there as well.

one thing i do believe although it's little remarked upon. Since World War II, canadian companies have been leaders as multinationals. Perhaps smaller than US or some european multis, but equally successful.

today there are numerous big canadian companies that are canadian in name only. Potash, big ag, big energy, big mining, snc lavalin, thomson reuters, valeant pharma, bombardier - all of these are principally carrying on business outside canada.

it happens to be my belief that these companies analyze sovereign risk & manage their overseas operations far better than any equity fund could ever manage its portfolio. Certainly better than i could ever do myself. So one gains international investment exposure by owning shares in these companies. Meanwhile one gains the benefits of well-understood north american accounting standards, excellent communications & constant news coverage in nearly all media.


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## Toronto.gal (Jan 8, 2010)

humble_pie said:


> but ... but ... i find that it's exceptionally difficult for an individual stock picker to follow stocks in overseas countries. *US markets are a little easier*, there are plenty ADRs there as well.


You're right, but I wasn't referring to EM or other more complex/risky markets, but had the US in mind actually; for someone who favours CND only stocks like blin, US would be the next best/logical choice. 

Having said the above, I have a large concentration of CDN favourites. :encouragement: And more than a year ago, increased my allocations in mostly CDN MNC type stocks! each: 

But intl. diversification also has many +s, especially in crises recovery.


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## Eder (Feb 16, 2011)

I have a lot of BCE...about 18% now and still adding on pull backs. After that I have Royal at 8% then nothing else over 5%. I think I would do better to sell off everything but 5 or 6 best ideas though...too much time wasted on research when I should be sailing, and think I probably will over the next few years.


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## Toronto.gal (Jan 8, 2010)

Eder said:


> Royal at 8%.....


And speaking of 'worst', RY is my highest in CDN banks as it had been the worst performing not so long ago.


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## jcgd (Oct 30, 2011)

Eder said:


> I have a lot of BCE...about 18% now and still adding on pull backs. After that I have Royal at 8% then nothing else over 5%. I think I would do better to sell off everything but 5 or 6 best ideas though...too much time wasted on research when I should be sailing, and think I probably will over the next few years.


That's what I have found. Just reading the quarterly and annual reports on ten companies can take a long, long time. I don't think anyone is doing a whole lot of research on 45 companies. I mean, checking the dividend, dividend growth, and a few more common metrics is not really the same things as researching a company. 

I probably spend anywhere from 4-10 hours researching before I buy a company, and I can honestly say that's about a quarter of the research I should be doing.

If you are doing quality research and have a sound investing philosophy, diversification will protect you from a market correction. It will also ensure you don't have any winners that drag you performance up noticeably. 

Just my $0.02

I should also mention that I see nothing wrong with the other methods, I just don't really see any other investing styles I would be comfortable with, besides indexing and what I try to do.


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## AltaRed (Jun 8, 2009)

avrex said:


> I think it is somewhat age dependent.
> 
> At age 30, you would have a small portfolio and a longer investment time horizon. So, having 10% or more allocated to a single stock, would not be very concerning.
> At age 60, having a large portfolio and shorter investment time horizon, with 10% or more allocated to a single stock, is probably not a good idea.
> ...


I tend to agree that more risk can be taken at age 30 than age 60. It also depends on one's risk tolerance on whether they would cut and run at the worst time. I would never go over 5% on any one stock and usually keep it to 3% or less of total portfolio (but I am also 64 and retired). 

That 3% criteria worked well with my Manulife holding pre-financial crisis. I lost well over 50% in that holding. What if I had 10% in this so called #1 blue chip insurance darling in Canada? No one saw this one coming, not even Jim Cramer or any other 'expert' who spouts such things. OTOH, holding ALL of your investable assets in 3-4 broad based (not boutique) ETFs would be just fine.


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## Cal (Jun 17, 2009)

Tailor the 'rules' of investing to your own needs.

Personally I have no holding over about 8-9% of my portfolio in any one stock at this time. But as I add at any given time that gets watered down a little.


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## doctrine (Sep 30, 2011)

ACQ is always threatening to take over my portfolio thanks to it more than doubling in 2012 and then up again another 120% this year, but that's a good problem to have, and I wouldn't want to take the tax hit by selling anyway.


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## Mall Guy (Sep 14, 2011)

Book value or market value ? Have some winners in a non-register account . . . re-balance and pay tax ? Have some winners in registered accounts . . . great dividends yield, so don't want to sell them either (like CDN banks paying 8%)


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## AltaRed (Jun 8, 2009)

Mall Guy said:


> Book value or market value ? Have some winners in a non-register account . . . re-balance and pay tax ? Have some winners in registered accounts . . . great dividends yield, so don't want to sell them either (like CDN banks paying 8%)


Market value. Book value is meaningless when it comes to determining 'current' size of position in the portfolio. Same concept as DCA. Shave some profits off your winners. Remember Manulife was a winner too....until it wasn't.


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## blin10 (Jun 27, 2011)

AltaRed said:


> I tend to agree that more risk can be taken at age 30 than age 60. It also depends on one's risk tolerance on whether they would cut and run at the worst time. I would never go over 5% on any one stock and usually keep it to 3% or less of total portfolio (but I am also 64 and retired).
> 
> *That 3% criteria worked well with my Manulife holding pre-financial crisis. I lost well over 50% in that holding. What if I had 10% in this so called #1 blue chip insurance darling in Canada? *No one saw this one coming, not even Jim Cramer or any other 'expert' who spouts such things. OTOH, holding ALL of your investable assets in 3-4 broad based (not boutique) ETFs would be just fine.


but i'm sure if you had 3% in mfc, 3 % in slf, another 3% somewhere else, in that crisis scenario you would probably be down same.... so it wouldn't matter if you had one insurance company at 15% or 5 at 3% each, bet it'd be down the same....


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## blin10 (Jun 27, 2011)

Toronto.gal said:


> *1.* What exactly do you mean by worst, valuation?
> 
> .


yes valuation wise


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## Sampson (Apr 3, 2009)

blin10 said:


> but i'm sure if you had 3% in mfc, 3 % in slf, another 3% somewhere else, in that crisis scenario you would probably be down same.... so it wouldn't matter if you had one insurance company at 15% or 5 at 3% each, bet it'd be down the same....


Hence the importance of diversifying among economic sectors IF you are picking individual stocks. I think it is equally important to diversify among countries for a similar region - despite the downsides presented by Belguy. Personally I feel that > 10% in and individual stock and also 10% in a single economic sector within a single country is far too much. Tackling 20 stocks allows you to buy at least 2 companies in each economic sector (classic 10 sector definition), and then you can also divide this into multiple countries. Problem with 20 is that you aren't really that close to the efficient frontier.

For our family portfolio, no single holding is >10%, although my wife's company stocks are pushing that limit. We will soon look to sell out of it, problem is, its one of these buy and hold for life types of companies. I personally think that diversification amongst countries is most important and the lack of diversity within the Canadian economy gives very ample opportunity to buy outside the country. If you don't find following > 20 stocks fun, or find it tough to get details on foreign countries, I would highly advise the use of ETFs for those holdings to make it simple.


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## AltaRed (Jun 8, 2009)

blin10 said:


> but i'm sure if you had 3% in mfc, 3 % in slf, another 3% somewhere else, in that crisis scenario you would probably be down same.... so it wouldn't matter if you had one insurance company at 15% or 5 at 3% each, bet it'd be down the same....


MFC is still a dog (has not recovered) and SLF has recovered to essentially pre-crisis values. If you had 15% in MFC, it would be painful still....today.

The point is that you don't always see the Black Swan coming. How about Enron?


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## Sampson (Apr 3, 2009)

AltaRed said:


> The point is that you don't always see the Black Swan coming.


Actually, Black Swans are defined as such that they are not predictable, although so many try to now predict the black swan.


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## blin10 (Jun 27, 2011)

Sampson said:


> Hence the importance of diversifying among economic sectors


that's a given, i'm talking about stocks within a sector....


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## Sampson (Apr 3, 2009)

blin10 said:


> that's a given, i'm talking about stocks within a sector....


If everything is "a given to you", why do you pose any questions?

This is a simple and purely academic question. The answer lies in correlation amongst assets, whether those be asset classes or individual stocks. It is pretty straightforward to calculate the impact of a increase/decrease in your overweighted sector/individual stock.

How do people cope with it, many examples, some care, some don't care. If you believe in portfolio theory, then you must adjust your behaviour to maximize your risk-return. If you don't believe in MPT, then put > 10% into a single holding, and put as much into a single sector.

This is all given.


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## blin10 (Jun 27, 2011)

from my original post "for example let's say portfolio is 100,000 and i want to own 20% in pipelines, so I have 20,000 to spend on pipelines"... seems like you have reading issues, so no need to be angry at me... let's have positive energy


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## blin10 (Jun 27, 2011)

AltaRed said:


> *MFC is still a dog (has not recovered) and SLF has recovered to essentially pre-crisis values.* If you had 15% in MFC, it would be painful still....today.


that's a good point....


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## MrMatt (Dec 21, 2011)

blin10 said:


> everywhere I read, people recommend to only have 5% single stock allocations (not sector allocations) in your total portfolio...
> my dilemma is that what if I want to buy the best companies with the best growth, there's only so many in each sector and I don't want to buy worst company just so I can say "i'm sticking to what others recommending"...
> 
> do you strictly follow allocations targets or some stocks represent much larger allocation percentage then the others ?


Well doing things that you don't agree with because of someones recommendation is dumb.

The same people proposing max 5% holdings are also recommending sector or subsector allocations of <20% for the same reasons you provide. 
In quite a few industries there are only a handful of major companies,

Personally I lean to the <10% target, however a single stock position of $5k-$10k is also a pretty reasonable minimum.


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## Jungle (Feb 17, 2010)

Toronto.gal said:


> And speaking of 'worst', RY is my highest in CDN banks as it had been the worst performing not so long ago.


Same here. it makes more sense to buy when there is value and not worry too much about having too much in one stock. But Of course don't put all your eggs in one basket.


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## Toronto.gal (Jan 8, 2010)

AltaRed said:


> *1.* MFC is still a dog (has not recovered) and *SLF has recovered to essentially pre-crisis values*.
> *2.* If you had *15% in MFC*, it would be painful still....today.
> *3.* I lost well over 50% in that holding.
> *4.* No one saw this one coming....The point is that you don't always see the Black Swan coming.


*1.* As Bill Clinton would say, it depends what your definition of 'pre-crisis' is.

Recovered? SLF ended the year in Dec.2007, which would be considered pre-crisis, at a high of $55+, and currently still trading at -42% from that high. 

Meanwhile, MFC was flying in 2007 as well; there was even a stock split in 06.

In the first significant hit in Oct.08, SLF dropped -34% in that single month, and MFC down almost an identical amount. By March/09, the insurers were down 70% & 77% respectively.

There are many stocks that are still trading way below pre-crisis levels, ie: SU, which was trading at $70+ in May/08, so yes, there are still many dogs out there.

*2.* If I had owned either/both at that peak [certainly would not have purchased at those prices], my concentration would have been way less than 15%. 

*3.* I had no realized losses, but I was down almost 50% as well, albeit post-crisis if you will, but in this case, I increased my allocation substantially when I was down by that much, and in the process, have accumulated hundreds of free shares via dripping, so I'm better off now for having picked the worst I think. As some have said here, these type of stocks don't drop 50% overnight; in fact, if you look at the 2008 chart, you'll see that the decline had been steady & did not suddenly drop from $55+ to $15+ in the case of SLF; it took 15 months to get to that low, and not without warning signals in between. 

In your case and mine, we chose to ride the stock down -50%; difference is that I'm far from retirement now, and even more so, in Oct.09, when I had purchased the stock. 

*4.* In fact, there had been plenty of warning signs from late 07, that at least professional money managers should have recognized, but most were asleep at the wheel.


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## yyz (Aug 11, 2013)

And if you bought MFC at or near the lows and have 15% or more as a holding you would be quite a bit ahead.I think MFC stock price will rebound more if/when they start to increase the dividend again.But with the stock gains I'm not complaining too much.


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## HaroldCrump (Jun 10, 2009)

Toronto.gal said:


> *4.* In fact, there had been plenty of warning signs from late 07, that at least professional money managers should have recognized, but most were asleep at the wheel.


Prof. Milvesky was warning about the unhedged risks that Manulife was taking on its books as early as 2007

http://www.thestar.com/opinion/colu..._may_pay_stiff_price_for_manulifes_pride.html


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## AltaRed (Jun 8, 2009)

HaroldCrump said:


> Prof. Milvesky was warning about the unhedged risks that Manulife was taking on its books as early as 2007


I remember some news item about that in that time frame and wondered briefly then about selling my MFC holding, but didn't because no one else was talking about it. Such is life. I have moved on.

@Toronto Gal - Did not realize SLF had traded that high. My error.


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## Sampson (Apr 3, 2009)

blin10 said:


> from my original post "for example let's say portfolio is 100,000 and i want to own 20% in pipelines, so I have 20,000 to spend on pipelines"... seems like you have reading issues, so no need to be angry at me... let's have positive energy


I believe your reading issues are as apparent. I actually responded to something in a second post, which I quoted. I also write specifically about your concern of having an individual stock with weighting over 5%.

You question was what do people do? Some people care, some don't. (also read the reasons why people would care, MPT - someone actually won a Nobel prize for developing the model, but who's heard of a Nobel prize before?)

You don't want to bother buying outside of Canada. That's not a good decision either.


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## humble_pie (Jun 7, 2009)

Sampson said:


> ... You don't want to bother buying outside of Canada. That's not a good decision either.




i believe that blin did give his reasons for buying canada? he said he likes the tax credits plus he wishes to avoid FX plays. These seem like valid reasons. If they work well for blin, then i'm happy for him.

as for the judgment that buying canada is "not a good decision," i continue to believe that it is possible to have a canadian portf that is actually globally diversified, at least in part.

CN rail for example is for all intents & purposes a US company. It's the 2nd biggest railroad in the US, after union pacific.

canadian oil, gas & mineral extractors are exploring, producing & selling all over the planet. Wherever they go, the canadian oil service industry follows them.

any canadian pharmaceutical startup is going to list in the nasdaq. It's going to have to develop or manufacture a drug that will have a bigger market than all-canadian. It will have to compete with US drug manufacturers or else it won't be able to survive. It will have to develop product to meet US FDA standards; canadian standards will pale in comparison.

there are many more examples. It may be true that a 100% maple leaf portf will be somewhat lopsided. It might be true that currency-adjusted competitive indexes for the US & canada over the entire past century show US markets to be somewhat ahead.

however, i also believe it's a good idea to weight for individual sociopolitical preferences. When an individual says he's most comfortable sticking to canadian markets, to me the comfort he will gain by staying local is going to compensate for any slight theoretical edge that model portfolio theory says he could obtain by going international.

as it happens, on a practical level i'm doubtful about the entire tribe of "international" or "international ex USA" equity etfs or mutual funds. The ones whose track records i've looked at show poor performance throughout this century. That's 13 years already. I do have 3 overseas stocks, though. One british, one dutch, one spanish. All 3 have US options, otherwise i wouldn't own em. They're not dogs, but can't say they are my favourite stocks, either.


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## dime (Jun 20, 2013)

Diversification is very important in my experience, esp if you want to be able to sleep at night. I think it's one of the main reasons I survived the slaughter of 2008-2009 and rode it through with a buy and hold. 

And there's not much worse than waking up to bad news on a "blue chip" top grade company that opens down 15% the next day. It seems to be able to happen to ANY stock at ANY time.

I often read experts talking about the theory of the best performing allocation, about how holding only a few top quality companies gets you better performance, but it's theory. The reality is what you're willing to risk, and if you value your life savings, likely you'll be increasingly trying to reduce the risks as the years go by. I now try to have twice the diversification as I used to, as well as reducing the co-relation of asset classes.


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## Ethan (Aug 8, 2010)

In order to have a maximum 5% weighting to any stock, one needs to have a minimum of 20 stocks in their portfolio. In order for me to properly track that portfolio, I would need to be spending time reviewing the quarterly reports for all 20 companies as well as their competitors. This takes a significant amount of time. I spend a significant amount of time reading quarterly reports and am comfortable holding less than 20 stocks.

In just looking at my and my wife's registered accounts (we both have a TFSA and an RRSP) our 3 largest holdings comprise nearly half of our total combined portfolios:

CNR - 23.0%
ACQ - 15.8%
TD - 10.4%

We hold no more than 7 stocks in any of the 4 portfolios. I feel more comfortable holding a small number of stocks I follow diligently, than I would holding 20 stocks that I would follow less diligently.


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## Ethan (Aug 8, 2010)

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” 

-Warren Buffett


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## james4beach (Nov 15, 2012)

Ethan said:


> In order to have a maximum 5% weighting to any stock, one needs to have a minimum of 20 stocks in their portfolio. In order for me to properly track that portfolio, I would need to be spending time reviewing the quarterly reports for all 20 companies as well as their competitors. This takes a significant amount of time.


Why I go with an index fund... yes all of that does take significant time. I find it takes less time to review the financial statements of the index fund, which are usually pretty straightforward.

I have met some good stock pickers, but I have met many more poor stockpickers (usually it takes a few years for that to reveal itself). My personal experience is that stocks I pick end up under-performing the market... so I gave up on the idea. I don't seem to be a good stockpicker. Buffett's quote is a good one but you have to ask yourself, how many of us really know what we're doing? How many of us are "on" 100% of the time, free of distractions such as jobs, etc?

It's easy to overestimate your stock acumen and be overconfident

P.S. the only single stock I own is BRK.B and everything else is an index fund


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## AltaRed (Jun 8, 2009)

Ethan said:


> In order to have a maximum 5% weighting to any stock, one needs to have a minimum of 20 stocks in their portfolio. In order for me to properly track that portfolio, I would need to be spending time reviewing the quarterly reports for all 20 companies as well as their competitors. This takes a significant amount of time. I spend a significant amount of time reading quarterly reports and am comfortable holding less than 20 stocks.


Some folks (like myself) stock pick the Canadian portion of the portfolio and ETF all (or most of) the ex-Canada stuff. Keeps it simpler.


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## humble_pie (Jun 7, 2009)

Ethan said:


> In order to have a maximum 5% weighting to any stock, one needs to have a minimum of 20 stocks in their portfolio. In order for me to properly track that portfolio, I would need to be spending time reviewing the quarterly reports for all 20 companies as well as their competitors. This takes a significant amount of time. I spend a significant amount of time reading quarterly reports and am comfortable holding less than 20 stocks.
> 
> In just looking at my and my wife's registered accounts (we both have a TFSA and an RRSP) our 3 largest holdings comprise nearly half of our total combined portfolios:
> 
> ...




this is a valuable post from a successful investor. Might i suggest that those advocating nameless foreign vegetable soup etfs according to some rote diversification formula look a 2nd time at this message? i certainly am.

look at those 3 brilliantly-chosen stocks which together form nearly one-half of the family portfolio. Two of them are towering titans, with important businesses in the US but roots in canada. Unlike US companies, their dividends will deliver canadian tax credits.

one holding - CN rail - already constitutes 23% of the total portf. This poster does not seem to be saying that he feels any need to rebalance, cut back or otherwise reduce CN, a company that is, in fact, a bellwether of the US economy.

the third leg is a legendary small-cap canadian success story. I imagine the triad is fleshed out with contrasting stocks in selected sectors, but the core structure is already well-balanced, resilient & strong. Chapeaux!


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## AltaRed (Jun 8, 2009)

What happens if CNR has a major disaster, aka BP in the Gulf? Stock price could be halved and depressed for a very long time. IOW, a stock can be a brilliant pick...until it isn't. That is the reason for diversification.


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## humble_pie (Jun 7, 2009)

railco has insurance
CN is not MMA at lac megantic
in the long multi-decade history of CN rail in canada, i don't believe any accident has ever halved the price of its stock, not even remotely ...

BP stock came back, remarkably rapidly as i recall.

i don't know when Ethan purchased CN & TD, but in the 4 years that have passed since Argonaut began posting in cmf forum about buying these 2 stocks, CN rail has tripled & TD bank has doubled.

there's no index that can come near.

i'm also wondering: if you truly wanted to walk your talk, would you not be better off buying strictly all-index vehicles, even in canada? since any one of the canadian stocks that u pick yourself could also suffer disaster ...


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## jcgd (Oct 30, 2011)

AltaRed said:


> What happens if CNR has a major disaster, aka BP in the Gulf? Stock price could be halved and depressed for a very long time. IOW, a stock can be a brilliant pick...until it isn't. That is the reason for diversification.


Ironically, for the person in the stock (who is in stocks because they don't need the money in the near/ intermediate future) this is a fantastic situation. A perfect buying opportunity. If nothing has really changed with the company you should honestly be estatic. If you are not, you shouldn't own the stock in the first place. 

It's like Bell and Telus over the last month. Anyone who already owned the stock bought more. If you sold, you are doing it all wrong.


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## Retired Peasant (Apr 22, 2013)

Ethan said:


> In order to have a maximum 5% weighting to any stock, one needs to have a minimum of 20 stocks in their portfolio.


This assumes that your entire portfolio is stocks. You could have a single stock, (and only need to follow/study that one company) and still be <5% of your portfolio.
Maybe I've lost track of the gist of the thread. Should this 'rule' about maximum 5% weighting be within the equity part of a porfolio or the whole portfolio?


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## Toronto.gal (Jan 8, 2010)

jcgd said:


> Ironically, for the person in the stock (who is in stocks because they don't need the money in the near/ intermediate future) this is a fantastic situation. A perfect buying opportunity. If nothing has really changed with the company you should honestly be estatic. If you are not, you shouldn't own the stock in the first place.
> 
> It's like Bell and Telus over the last month. Anyone who already owned the stock bought more. If you sold, you are doing it all wrong.


+1.


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## Squash500 (May 16, 2009)

IMHO it all depends on what type of job you have (and your investable asset level) if you should invest in individual stocks(and at what percentage) or not. I've been friends with this guy since childhood who is very wealthy in his own right. He married a woman 15 years ago who is a very successful litigation lawyer and senior partner in a major Canadian law firm.

He tells me that as far as he's concerned his wife's very secure high income is like a "Bond"---LOL. He told me that her salary is north of $750000/yr. Therefore he told me that approx 85% of their total assets are in individual stocks. He told me that he couldn't care less if their stock portfolio goes down as they can totally invest for the long term.

My buddy is a stock picker and often talks about the 5 and 10 "baggers" that he invests in. He never talks about his losers though. As usual just my opinion.


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## MrMatt (Dec 21, 2011)

Squash500 said:


> My buddy is a stock picker and often talks about the 5 and 10 "baggers" that he invests in. He never talks about his losers though. As usual just my opinion.


I have more losers than 5 baggers.
To be fair I only really have 2 that doubled in a reasonable amount of time, and 1 real loser, the remainder are mostly pretty good picks that have done quite well.
Not much to really brag about, but IMO quite respectable.


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## Toronto.gal (Jan 8, 2010)

Squash500 said:


> 1. He tells me that as far as he's concerned his wife's very secure high income is like a "Bond"---
> 2. often talks about the 5 and 10 "baggers" that he invests in. He never talks about his losers though.


*1.* And what if she divorced him? Being married 15 years no longer = 'secure' these days.

*2.* Someone who 'often' has that level of success, most definitely has losers as well. But he might also not talk about the losers if the winners still have him in the black. 

Personally, 99% of my losses fall in the unrealized category, so not much to talk about. When taking into account the opportunity cost & other factors, sure I should have sold earlier at times, but I'm not good at cutting my losses early, because not only do I give myself a margin of safety [buy low], but I also believe in my stock picks; and after all, patience has proven more successful than detrimental in my 4 years of DIY, so I have reason to be confident, and for that reason, I rarely take an early exit; rather, I do as jcgd noted upthread. 

There are so many advantages for long-term investors when stocks [not just any of course] fall hard! For those that missed the March/09 lows, there have been same, and even better opportunities to be had since. DRIPpers understand and don't complain, they smile & increase their allocations [am sure some cry also sometimes].


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## Toronto.gal (Jan 8, 2010)

MrMatt said:


> I have more losers than 5 baggers.


This could be interpreted as an apples to oranges comparison.


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## jcgd (Oct 30, 2011)

I don't have a single double bagger, let alone a five bagger. However, without a timeline the term is meaningless. In 20 years I'm sure lots of my stocks will be double/ triple/ ten baggers. Won't mean much if my annualized return on a stock is 4%, however.

My dad fondly recalls an old friend who made something like two million bucks on AOL during the internet bubble. That's pretty cool, but I'm not sure how you would know when to sell. I wouldn't, and I would hope I would sell early rather than late if in a similar situation as I don't know how someone would now when the top would be.

Stocks that jump quickly in value startle me more than stocks that drop a little after a buy them. When I make 30% in a few weeks it scares me. The ideas that I've been patient on and start to work out keep me much calmer and I feel better holding them even when up 50 or 75%. When stocks rip up quickly it makes me wonder what I missed.


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## Sampson (Apr 3, 2009)

humble_pie said:


> i believe that blin did give his reasons for buying canada? he said he likes the tax credits plus he wishes to avoid FX plays. These seem like valid reasons. If they work well for blin, then i'm happy for him.


The reasonings are a bit glossed over though.

This really is math - for smaller accounts, definitely buying into other countries, incurring FX fees, and loss of potential tax credits is a significant disadvantage - but these reasons alone must be numerically compared. A valid reason that is bounced around as an idea is often much valid than if real numbers are used.

I'm on the fence about the diversification bit and I don't want to move the conversation in that direction. Concentrated portfolios certainly will result in higher returns if they work. They will also result in much lower returns (compared to mean indicies) when they do not work. Whether one can either stomach or sustain the potential loss, that for me is really the biggest question.

I don't think anyone whom has studied or follows MPT will try to say diversification results in higher overall returns - it is true it might not, but it is true that companies like Enron looked fantastic for a while, even BB was a darling up until the iPhone was released. Crap happens to individual stocks so how much of a problem to your own portfolio would this be. If you can handle it, then 5 stocks, 20% allocation each could potentially give you returns of 100%-200% per year.


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## Andrew (May 22, 2009)

I probably have 50% of my funds invested in individual stocks and the rest in a diversified ETFs. What is important is looking at your portfolio holistically and making sure you don't have a high concentration of risk in 1 particular stock or 1 sector unless you are damn sure that your concentrated bet has a high probability of bouncing in your favour .


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## My Own Advisor (Sep 24, 2012)

I'm with you Andrew, that will probably be my equity split as well, 50% individual stocks (about 30 dividend payers) and 50% ETFs, owning at least one CDN-listed ETF and one U.S.-listed ETF.


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## AltaRed (Jun 8, 2009)

humble_pie said:


> i'm also wondering: if you truly wanted to walk your talk, would you not be better off buying strictly all-index vehicles, even in canada? since any one of the canadian stocks that u pick yourself could also suffer disaster ...


As long as one has sufficient diversification, the 'loss' of one stock does not crater the portfolio. The issue that has been debated for a long time by the professionals and academics is how much diversification is enough and when does too much diversification start to detract performance. Googling brings up many studies and theorys on this matter. Hence the reason why I would not hold more than 5% in any one stock. I've seen it. Manulife for one lost 2/3 of its value. One does not know in advance which stock will suffer disproportionately. 

Since I believe the more financially sophisticated members of this forum should be providing well founded and substantiated financial information/theory/knowledge to those on the steep learning curve, I think it is a disservice to promote the 'good fortune' of one investor as a basis for sound investing principles. That said, everyone has to decide for themselves if they want to swing for the fences or make base hits.

As for BP, it will unlikely ever be the same company as it was pre-crisis, certainly not vis-a-vis its peers. Anyone holding that stock the day before the crisis ($60) already knows that.


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## humble_pie (Jun 7, 2009)

sampson there are 2 themes being discussed here, are there not? these both appear in your message just upthread. They overlap but are not quite the same thing imho. One is diversification geographically. The other is diversification across sectors, even diversification within each sector.

i'm not a big fan of geographical diversification. Some leading canadian companies are multinationals with most of their business outside canada, so a reasonable degree of global diversification can be achieved with these companies while still retaining dividend tax credits, access to plentiful local news & reliance upon north american accounting standards. I also believe that most "international" etfs have underperformed for well over a decade.

i'm in favour of diversification across sectors. Who would not be? I admire those who can successfully carve out a pristine top-performing portfolio with only 5 or 7 stocks. I admired a classic triad of carefully-chosen stocks upthread. These structures are like IM pei or louis kahn buildings. Stripped to the bone, stark, muscular, imposing.

but i don't do this myself. I have maybe 22 stocks plus long-term interests in 10-12 US stocks via option structures.


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## Toronto.gal (Jan 8, 2010)

humble_pie said:


> 1. I admire those who can successfully carve out a pristine top-performing portfolio with only 5 or 7 stocks.
> 2. I have maybe 22 stocks plus long-term interests in 10-12 US stocks via option structures.


*1.* They have my admiration as well! However, as I favour volatile stocks, I could never have just that low#, at least not now, as it just would not suit my personality nor interests. I'm a confident enough investor by now, and with time for DD, but still, I have only been DIY for 4 years, so no way that I would limit myself to 5, or even 10 stocks. Confidence alone & even solid experience, is not enough these days, as anything can happen. AltaRed likes to use MFC as an example [even when SLF lost almost as much, lol], but leaving extreme situations aside, ie: 08 crisis, every day can bring totally unexpected surprises, ie: cartel breakups, lol. But I certainly don't favour over-diversification either.

*2.* With 2 takeovers this past week, I'll soon be down to 25 stocks, which for some time, I have wanted to bring to 20, but with so many interesting companies out there, I just have not been able to. Now my goal is to actually increase it to 30/35 stocks, with many hold/forget type companies in there, ie: banks/rails. I'm about 80% in CDN/US markets [many multinationals], and 20% in foreign stocks around the world. Guess who [geography-wise] were the big time underperformers?! :rolleyes2:. Also looking at long-term option structures.


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## humble_pie (Jun 7, 2009)

AltaRed said:


> Since I believe the more financially sophisticated members of this forum should be providing well founded and substantiated financial information/theory/knowledge to those on the steep learning curve, I think it is a disservice to promote the 'good fortune' of one investor as a basis for sound investing principles. That said, everyone has to decide for themselves if they want to swing for the fences or make base hits.




it is not a disservice in the least! if you are referring to my wholehearted admiration for another member's small, perfect, carefully chosen investment portfolio expressed upthread, this is indeed a "service" to the many members of the forum who carry on buying individual stocks & who share information here.

what i sought to do was shine a spotlight upon the other member's accomplishment, how it worked. He did not succeed through what you are frivolously dismissing as "good fortune." He achieved success through hard work, in-depth research & very obvious strong talent. This member has a long track record of providing hi-quality research & hi-quality information to this forum.

all parties here are free to pick & choose. Shining a spotlight upon one strategy or another does not mean that anyone should blindly copy.

as it happens, i myself do not practice the same bulls-eye target investment strategy. I hold roughly 22 stocks plus another 10 US stocks that are held in longterm option formations. But i know when to take off my hat & say Chapeau! when credit is due.

altaRed you seem to be implying that anyone who disagrees with you is providing a disservice to the forum. That in itself is a disservice imho!


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## GoldStone (Mar 6, 2011)

humble_pie said:


> what i sought to do was shine a spotlight upon the other member's accomplishment, how it worked. He did not succeed through what you are frivolously dismissing as "good fortune." He achieved success through hard work, in-depth research & very obvious strong talent. This member has a long track record of providing hi-quality research & hi-quality information to this forum.


You omitted one small but important detail. The member in question is a chartered accountant. He is professionally trained to read and analyze financial statements. His profession gives him an edge over most other forum members.

Warren Buffett: "Diversification is a protection against ignorance. It makes very little sense to those who know what they are doing."

A chartered accountant doesn't need to diversify. He obviously knows what he is doing. Most of us here are not chartered accountants.


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## Toronto.gal (Jan 8, 2010)

It doesn't matter what the member in question does, for the message was not to copy him, or anyone else for that matter.

Imagine if everyone here was just talking about their 1 hour a year portfolio rebalancing.


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## humble_pie (Jun 7, 2009)

what, now you're saying that only certain professions are anointed to pick stocks?

gold it has escaped me that you must be a CA too. If not, how could you possibly "omit ... one small but important detail" & summon up the galling audacity to actually. buy. a. stock.

(signed)
the scullery spring


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## GoldStone (Mar 6, 2011)

I don't put 20% of my portfolio in one stock. I know my limitations.


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## GoldStone (Mar 6, 2011)

Toronto.gal said:


> Imagine if everyone here was just talking about their 1 hour a year portfolio rebalancing.


There goes the dig against indexing. You just can't resist.

This entire thread is about diversified stock portfolios vs. concentrated stock portfolios (nothing to do with indexing). I think we can all agree that concentrated stock portfolios are fine, as long as you have the necessary skills to build them.


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## humble_pie (Jun 7, 2009)

but it's not about you. This episode is only about one starry example of superb stock-picking by another. It's a lovely thing to hear about, a lovely thing to see the elegant geometry laid out as it has been in cn rail & td bank for nearly 4 years now.

do u have a hat, goldstone? why not take it off & wave it around & shout olé! c'mon, you liked the carolina chocolate drops, so we know that, somewhere, somehow, you're not made entirely of stone each:


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## jcgd (Oct 30, 2011)

There is also a large difference between that 20% of a portfolio having a value of $20k versus a value of $200k. On my piddly portfolio, my largest position could go to zero and it would take me a year or two to make up the lost ground with savings. 

It would be rather rediculous for someone like myself, with a portfolio of say $50k to have 30 positions. You need to have a concentration of 10-25% to have a half decent position in a stock. 

If you are buying and holding and do some decent research I could see a young person building one new position with say ten grand per year, for ten years. It would be extremely concentrated for the whole decade, but you'd have real positions that have real conviction that could amount to a substantial size down the road.

Looking back, and I'm pretty sure the experienced folk told me this from the get go, a lot of work goes into picking a stock and it is almost wasteful to work so hard to put $1000 to work. I could have made more money working an hour than I make in a year on my $1000 positions. I should have either indexed my first $10k or bought 1-2 stocks I had researched thoroughly. 

I'm glad I spent the time learning, but if I had spent that time making more money and had concentrated more on my first few picks I think I would have a lot more money today.


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## GoldStone (Mar 6, 2011)

humble_pie said:


> do u have a hat, goldstone? why not take it off & wave it around...


Oh, sure. Well done, Ethan! 

(A side note to novice lurkers: Ethan is a trained professional. Do not try his tricks at home.)


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## Toronto.gal (Jan 8, 2010)

GoldStone said:


> There goes the dig against indexing. You just can't resist.


No, it wasn't a dig per se, or maybe just 1/2 a dig.  My point had just been that different type of investors make the forum more interesting; we can choose to learn [not copy] from those that make sense to us, or not.


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## jcgd (Oct 30, 2011)

GoldStone said:


> Oh, sure. Well done, Ethan!
> 
> (A side note to novice lurkers: Ethan is a trained professional. Do not try his tricks at home.)


I'm pretty sure Ethan* learned* everything he knows. Nothing is stopping us from learning too. Everything else I know I learned.


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## humble_pie (Jun 7, 2009)

GoldStone said:


> Oh, sure. Well done, Ethan!



there u go. In spite of the stone in your name, it's possible you have a heart of gold after all.




> (A side note to novice lurkers: Ethan is a trained professional. Do not try his tricks at home.)


tricks? cn rail & td bank are not tricks. Some large canadian multinationals are bigger & more conservative than many indexes, more sturdy than speckled portfolios consisting of many-little-positions-but-nothing-greater-than-5%.

of course we should try tricks like td bank at home. Of course novice investors should be thinking about how to identifiy the next td, the next google, the next cn rail, the next valeant pharma.

we don't teach our children to avoid exams because they might fail. We don't teach them to never go out for sports because they might lose. Why would we do this when it comes to investing?

to end on a practical note: imho we should teach both. How to strive for olympic gold plus how to keep a big safety net. If their accounts are small, as is often the case with novice investors, then the safety net means mainstream etfs or index funds, in addition to one or 2 stock picks.


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## peterk (May 16, 2010)

jcgd said:


> There is also a large difference between that 20% of a portfolio having a value of $20k versus a value of $200k.


Indeed. My total stock portfolio is worth 21k and I have 7 positions. The largest holding (Vale) is 22% of the portfolio. I will probably have about 10-15 holdings through the 30-100k networth phase over the next couple years. Aiming for a certain allocation seems silly to me at this point, as buying/selling a single tranche can change things >10% in an instant.


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## GoldStone (Mar 6, 2011)

humble_pie said:


> tricks? cn rail & td bank are not tricks.


RioCan was a very solid pick until it dropped 17% in one year. This can happen to any stock.

By tricks, I didn't mean any one stock in particular. I meant, do not run a highly concentrated portfolio unless you are a chartered accountant or a CFA or some such. Risk management is more important than performance chasing. Single company risk is the easiest kind of risk to deal with. You diversify it away. That's the closest you can get to a free lunch in this game.


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## humble_pie (Jun 7, 2009)

GoldStone said:


> ... do not run a highly concentrated portfolio unless you are a chartered accountant or a CFA or some such.



gold how can u insist upon this?

when we posted our tfsa results last january, you were doing OK with something like 35k, if i am recalling correctly. 

i teased you. Ha u didn't get that with index funds, i said.

no, you agreed. Success apparently hadn't come from selective stock picking either, you said. Rather, success had walked in the door via another asset called play money, you told us.

i'm not a CA, not a CFA, just a dumb crumb at the back of the bakery. Yet my tfsa - last january - was 45k. You don't even want to think how it looks today. It never has more than 4 or 5 things in it.

i heartily disagree with this stuff about CA & CFA. What mary poppins would say. Stuff & nonsense.


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## AltaRed (Jun 8, 2009)

humble_pie said:


> Yet my tfsa - last january - was 45k. You don't even want to think how it looks today. It never has more than 4 or 5 things in it.


I am guessing you have more invested assets than just your TFSA. FWIW, my TFSA is concentrated too, but I never look at the TFSA in isolation. Each of the few holdings is not even 1% in my overall portfolio.

I am not arguing against the skills (and yes, good fortune) of one individual here who clearly is doing well. My hat is off to him. Success because that member has the skills. But also good fortune because companies like CNR nor TD have not had a major crisis. Imagine if one of the holdings had been MFC (albeit maybe a very skilled investor may have noticed that MFC was not hedging off its risk)? Skilled analysts and money managers missed that one in spades. How about BAC or several other banks? Sometimes the unimaginable happens.

I also agree with posts where members have argued that it is much different if one is young with an account of $20-50k, or someone who is about to retire with a 7 figure account. If I was relatively young with a relatively small portfolio, I would be concentrated too for all the reasons given.


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## GoldStone (Mar 6, 2011)

HP, our two TFSAs (a.k.a. play money) are indeed very concentrated. But they are just a small part of the family portfolio. Our top TFSA position is 6% of the overall portfolio. In dollar terms, this position size is well above my comfort level. I keep it because my ACB is very low and I still see a lot of upside. I would never ever start a new position of the same size.


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## Sampson (Apr 3, 2009)

humble_pie said:


> One is diversification geographically. The other is diversification across sectors, even diversification within each sector.


Agreed, and I didn't exactly do my best to separate these related concepts in my post. I'll leave the geographical diversification out of this present discussion.



humble_pie said:


> i'm in favour of diversification across sectors. Who would not be? I admire those who can successfully carve out a pristine top-performing portfolio with only 5 or 7 stocks. I admired a classic triad of carefully-chosen stocks upthread.


My critique is only whether it is possible to achieve a cross-economic sector diversified portfolio if 20% of equity allocation is in a utility/pipeline. You are exposing yourself to 2 independent risks, (1) possible over concentration in a single holding - prone to significant risk on your portfolio, AND (2) lack of diversification among economic sectors.

I pick stocks, but I still based the portfolio construction on the principles of diversification so would never have more than 10% in a single holding. We are already coming close to this threshold with my wife's company stock. We may have to sell some off shortly, but that will be tough to convince her to sell a big time winner.

Re: discussion about background needed to be a skilled stock picker and construct concentrated portfolios - i'm of the opinion that I can't do it, I see sizeable risks I don't want to incur, so I avoid it. Might work for others, but I suspect for an average non-CMF investor, it is mighty difficult. I look at some of my family's history of investing in stocks, and lots of money is lost. In the end, they can 'afford' it so what can you say. One simply has to look at it objectively and make sure they are not overweighting the presence of winners to suggest they can maintain concentrated portfolios over the longterm


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## humble_pie (Jun 7, 2009)

Sampson said:


> My critique is only whether it is possible to achieve a cross-economic sector diversified portfolio if 20% of equity allocation is in a utility/pipeline. You are exposing yourself to 2 independent risks, (1) possible over concentration in a single holding - prone to significant risk on your portfolio, AND (2) lack of diversification among economic sectors




? the poster with 3 large leading stock positions did not have a canadian utility/pipeline among them.

he had 2 multinational giants that are active in a vast north american cross-section of banking, insurance, credit card, wealth management & other financial services, plus raw materials and finished product exposure via railroads, shipping, trucking, warehousing, port terminals & customs brokerage services, from the atlantic to the pacific, from northern canada all the way to buenos aires argentina.

imho that's diversified. Not diversified enough for myself, but for someone else's comfort level, apparently diversified OK.

the 3rd leg, the auto story, was a microcap arrow that had flown straight to the bullseye. It's good to have some exposure to emerging stories because, when these succeed, they usually have strong growth profiles. So acq made an intriguing 3rd leg.

i for one think it's a privilege for readers to view messages like the CN/TD/ACQ post. It's interesting to see nifty things accomplished. We're all here to learn. There was never any suggestion that any part of the tight focus should be imported into our own portfolios.


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## blin10 (Jun 27, 2011)

i know bad example, but i'm missing out on huge gains with 3 stocks that i own just because I bought something else for allocation purposes, instead of loading up on those three... yes i know what if those 3 stocks went downhill, but odds were in my favor


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## Sampson (Apr 3, 2009)

Hi Pie, so many topics at this point I think it is all getting muddled. I was referring to the OP, with suggestion that 20% be bought into IPL or other equivalent, and not related to the trinity of CN/TD/ACQ.

I agree with you that if you can stomach it, you will be much further ahead with 'diversification light', capturing the benefits of business that capture monies from all areas of the World. this strategy has worked well for me also in that as the US and Eurozone economies had been struggling, those Canadian and American businesses with significant emerging market operations have been shining. I've always said that the best returns will be had by those with concentrated portfolios, just not something I'm willing to try. No doubt any stock picker feels a knot in their stomachs when they see their winners and think to themselves "why didn't I only hold my best 5". I personally don't trust those knots in my stomach, I've made bad calls just like the next and realize those can be made as frequently as the winners IF unlucky.

I partly agree with you that buying large multinationals within one's own country can benefit from geographic, international diversification. My personal portfolio actually supports this. My EAFE allocations are well below what my 'target' is, but the large Canadian and American firms have been making up for that. I just don't have a good handle of how much, therefore my comfort is to buy into those foreign markets directly. There are typically published studies using these broad stroke indicies rather than piecemeal custom portfolios that you are talking about. I guess I don't have the gumption, ability, or time to do those comparisons myself, but I NEED the validation for comfort.


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## OnlyMyOpinion (Sep 1, 2013)

Two considerations, not mentioned yet as far as we can tell:
i) What is the outlook for future savings and purchases? If you are in a position to be growing your holdings at a good clip, then a 5% holding today becomes a smaller % of your portfolio in a year or two?
ii) Are you DRIP'ing your dividends? Consider that too small a share holding may limit your DRIP and leave mostly uninvested cash each quarter. On occasion we've actually gone in and added to our position to get us 'over the hump' and optimize the # shares the dividend is buying. Love seeing it reinvest in a stock that is yielding 4 or 5%.


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## namelessone (Sep 28, 2012)

For long term buy and hold positions, I aim for maximum of 5%. For short term value positions, sometimes, I go as high as 15%.


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## Toronto.gal (Jan 8, 2010)

OnlyMyOpinion said:


> 1. Are you DRIP'ing your dividends?
> 2. Consider that too small a share holding may limit your DRIP and leave mostly uninvested cash each quarter.


1. For sure I'm dripping, and mentioned this upthread as well. 
2. I automatically reinvest dividends where possible [with few exceptions, ie: AAPL], rather than hold cash and/or use for something else, though the latter can work well also, ie: paying mortgage, etc.


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