RE: "I have heard Brinker say several times, that in a stock portfolio, one should not have more than 4% of the funds in any one company."
First, I believe that Bob's rule is that the cost of the investment should not exceed 4% of the equity portion of a portfolio. Thus, his rule does leave some room for cases where the original cost of the stock is less than 4%, but, the current value is greater than 4% because of stock appreciation. I believe that Bob set his rule because some people put all of their money into a single stock after he recommended it, so he had to set some guidelines to protect the less experienced investors who don't understand specific stock risk.
Your post, however, does bring up an interesting question: What is an appropriate level of diversification? Many years ago, a portfolio of 8 to 12 stocks (in different industries) was considered by many to be adequately diversified. In the late 1980s, the trend was to expand diversification by investing in a mutual fund of stocks. In the last several years, it has become commonplace to invest in a large number of mutual funds. In fact, as we all know, people recently began adding "funds of funds" to an already diversified portfolio. Clearly, it gets to the point where regression to the mean is inevitable.
I believe that a simple rule such as "a portfolio of 8 to 12 stocks (in different industries) is adequately diversified" is nonsense in today's world. Diversification should go beyond owning stocks in several different industries. One should also diversify equity holdings across several continents, or at least countries. Additionally, I believe that one should diversify his net worth across several asset classes (stocks, bonds, real estate, cash equivalents, etc.).
That said, I must make a confession: I am currently over-diversified. This is not by plan. Rather, I find myself addicted to investing to such a degree that I'm a "stock shop-a-holic." I just can't say no to a good, growing company. And participating in threads such as those on SI is like throwing fuel on the fire.
Please guys, talk me into selling my UTEK! Or my Price Science and Technology Fund! Or my ... ...
Best wishes,
I2 |
