>My questions are; (1) do I sell many good stocks for one great one, WIND?
>and (2) what percentage of my portfolio might be invested in WIND?
Excellent questions. Having labored over all those posts, you surmised correctly that my feelings about optimal asset allocation varies considerably from the standard fare dished up routinely by most financial advisers. Unfortunately, I'm leaving first thing in the morning for a few weeks, so let's try to pick this up again later.
In the meantime, here are some thoughts to chew on:
The richer you are relative to your accepted standard of living, the more you should concentrate your investments in companies in which you have a high belief they will succeed. For example, if you require $250K annually to live, and your portfolio equals $10 million, and you are convinced that WIND's stock will double on average every two years, for many years, and there is no other stock for which you strongly believe the same (or better), then you might put as much as 75% of your portfolio in WIND - but NOT significantly more. (Remember our justification using utility theory for Jerry Fiddler selling 30% of this WIND stake.)
Given the same assumptions, but your portfolio equals $1 million, then the maximum percentage you should allocate to WIND would reduce dramatically to as low as 10%.
However, suppose you spend $50K annually to live, you haven't saved anything and you are within 10 years of retirement, and you just inherited $50K. Pick two really good stocks (WIND being one), split the money and go for it.
Suppose there are five other stocks you like almost exactly the same as WIND. Then, unless you are a super risk-taker going for the gold, you should split your investments equally among the six stocks. Suppose there are 1,000 other stocks you like almost exactly the same as WIND. Then, you should split your investments equally among the 1,001 stocks. (In principal, I am not anti-diversification. The problem is finding the other stocks you like as much as WIND.)
The classical answer that you should diversify your holdings across companies, sectors, countries, type of financial instrument, etc. is guaranteed to keep you from being wealthy and to keep your financial advisors from being sued. In my mind, this is the main sense in which traditional asset allocation minimizes risk.
Most of the above statements are provocative, and require lots of logical thinking and analysis before they should be believed and put into practice. Time for that later.
Also, some of the stocks you own have been excellent performers in the past, and many investors think will perform well in the future, like CSCO. Make sure you have serious concerns about the future performance of a company before you just dump the stock. Other companies you own may have disappointed over the last few years, but hold promise of much improved future performance, like QCOM. Be careful about selling these companies prematurely.
Given your age and situation, there is one other extremely important issue you should consider. What would become of your estate if you succeed in doubling a number of times over the next 10 or 20 years? You may find your success burdens your heirs with confiscatory estate taxes. One of the best estate planning vehicles I know of is to have a large portion of your portfolio in a stock(s) with extremely low cost basis. At any time prior to death, you can deplete the estate without any tax consequences at all simply by gifting stock to relatives. (Example: in 1970 you bought 1000 shares of WalMart at $20. Today you have 1 million shares after splits at $35. You give 500,000 shares each to two relatives today to deplete the estate. Since each transaction is at cost (500*$20), they pay no gift tax. If they sell shares, they would pay capital gains on nearly the full amount of the sale, but federal capital gains is only 28%, soon to become 20%, much better than the dreaded death tax on estates above nominal minimums. And there may be no reason for the heirs to sell the stock, so the gains tax continues to be deferred.) This means that there are compelling reasons to build the lion's share of your portfolio using companies that you believe strongly can grow for decades. How many companies can you find that have this property? One, two maybe three?
Hopes this help some.
Allen |
