Warning: You Have Too Many Stocks in Your Portfolio
Thursday, October 22, 2009 | Bob De Dea
According to a study done in the 1990s by a couple of British anthropologists, the size of the human brain is correlated to the ability to cope with complex human social networks. In other words, these guys figured out that the total number of kin and friends that the "average Joe" can deal with is around 150.1
Even if this is true, let me ask you, how many truly close friends do you have?
Jesus had 12 disciples. Hugh Hefner had hundreds of girlfriends (at least!). But according to an informal Facebook poll, most people have only two or three best friends.2
And in a world where we're obsessed with getting more, more, more, you might be starting to find that less really is more.
So why do you have 60 different securities in your portfolio?
This is the question I asked myself not long after I’d ventured into the world of investing.
At the outset, I was gung-ho and excited to try my hand at investing in the stocks I was reading about in the money mags and in the special reports I received in my e-mail inbox, and hearing about on the online video blogs.
Whether it was an “up-and-comer” here, or an “outstanding penny stock” there – I wanted to own them all!
So I bought and bought (and bought ...) until I had acquired what I thought was a well-diversified portfolio.
“Now,” I thought, “I’ll just sit back and wait for my money seeds to grow into harvestable plants.”
But that wasn’t in my future.
Does That Scenario Sound Familiar?
You might have found yourself (or might find yourself right now) in the very same place.
The choices I’d made were unresearched and turned out to be volatile and just plain naïve. I constantly tried to track the performance of way too many stocks and, as a result, couldn’t treat each of my seedlings with the proper care and attention each deserved.
My funds dwindled to dust; my investing life almost ended before it began.
The bottom line is that there is no way any human being can track more than a dozen investments at a time. (OK, 20 may be a more-realistic upper limit for some of you.) This is, of course, outside of your long-term, blue chip, or Exchange-Traded Fund holdings. I’m talking about open trades.
Know When it's Time to Streamline
The reason is that, when you're watching a security -- if you're doing it right -- you're also tracking its competitors, its customers and maybe its suppliers.
Let's say that means you're also watching three other companies for each one you've got a position in. You've just quadrupled your research. If you've got 50 stocks, that's 200 companies to follow.
Catching my drift?
Learning this is a hard lesson. Believing it before you’ve learned it is even harder.
Only You Can Make it Easier on Yourself
People will say, of course, that there are software programs that will track and notify you when certain parameters are met. And I will say to them, “Nice, but do you use a software program to tend your garden or raise your kid?!?”
OK, maybe that’s extreme, but my point is that some things are best left to human rather than mechanical judgment.
Although our goal is to eliminate emotion from the investing equation, there is still much room for discernment and discretion.
A gardener has intimate knowledge of the soil he tends and the requirements of the items he plants. The investor, too, must study his or her choices and know the history of the security and be content with its limitations (e.g., support and resistance levels, range of earnings estimates).
It is then that patience, perseverance, and familiarity can pay off.
These qualities are learned and cultivated. And you can’t do that if you’re constantly running around like poultry with no cranium because you have so many -- too many -- things to watch.
So take the time to figure out what your level of risk-aversion is, to decide how you’re going to invest and to acquire a toolbox of indicators that you use, so that you can find the companies or the types of securities that fit your style of investing.
Just don’t buy too many of them!
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Bob De Dea
Chief Investment Officer
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