Diversification or Concentration?

[Peter1B1]

Diversification is a convincing strategy to reduce risk of capital loss. It mitigates 'all eggs in one basket' and encourages exposure to a wide range of asset classes - I think we all get that. But the contrary argument is that the greatest gains for a particular period of time arise from a narrow selection of markets and individual stocks, meaning that diversification acts against the possibility of greater success through concentration.

So I'm pondering whether to consciously blend the two approaches in a pf. For example, to adopt a more general geographic and market sectors approach for a chosen diversified % of pf; and a specific risk-exposed approach for the balance.

Taking a view today perhaps I'd do 2/3rds diversified, focussed on Global/US/EU/Asia/Japan/a little China: this picking up a general spread of markets from those regions though one could bend it within broad sectors/markets based on suitable ITs and ETFs for large or small cap, high or low yield - reflecting old or new economy. Low-cost trackers might suit quite well.

For the 1/3rd balance, I'd perhaps concentrate risk on IT/Comms, Defence, rare earths, perhaps bio/healthcare. You could go further with individual stocks but I'd be happy with active management focussing on my selected 'concentration themes'. (I'll post shortly on a possible investment house I'm starting to look at).

I'm sure this thinking is not new so I will appreciate foolish thoughts, please.

[Newroad]

Hi Peter 1B1.

Sounds like a "Core & Satellite" style portfolio - they were the rage 5-10 years ago IIRC. It's probably a reasonable approach, if you fancy some active management - just don't let the satellite tail wag the core dog IMO.

Regards, Newroad

[tjh290633]

I think that, if you have a sufficient number of diversified holdings, the odds are that something will happen to one or other of them. I hold 35 shares, in about 16 sectors by my own definition, with several sub sectors in those. Corporate activity is not that frequent, but demergers of Haleon and Woodside Energy last year are typical examples. Currently there are rumours about Aviva being a takeover target.

I don't think that you need to go looking for activity, but it's nice when it happens.

TJH

[Monty]

Interestin thread. I moved from a selection of around 10 IT's some 18 months ago to a selection of just 3 ETF's, sometimes 4. This has turned out very well for me but it is not as interesting as holding a few more stockks. On the one hand I think that just 2 or ETF's is all you need but on the other hand I do think you can outperform the ETF choices either by adding a riskier ETF such as IIU or going the more ative approach with Investment Trusts now that they are on greater discounts.

I am when considering what to do next, mindful of a comment from Charlie Munger when asked if he thought as Warren Buffet does, that simply holding the S&P 500 with maybe 10% in bonds was good enough. Munger replied why would he want to hold all that crap! At the time Munger mentioned he held just 6 main stocks and that was all he needed.

I'd ummarise by suggesting that it is down to what each investor feels happiest with. I will likely soon move to a core ETF of around 65% with the remainder in active IT's where I think outperformance is possible. My aim as always is to outperform VWRL.

[SalvorHardin]

When I was working I ran a very concentrated portfolio (11 companies on my retirement date, mostly small and medium sized oil companies like Soco) but after retiring in 2003 I started moved money into four core investment trusts and several large operating companies (not oil companies).

My portfolio is about 20% in four investment trusts (Caledonia, Finsbury G&I, Foreign & Colonial and Law Debenture), 30% in five operating companies and 50% in twenty-six other operating companies and four investment trusts. So there is a concentrated part (9 forming 50%) and a diversified part (30 forming the other 50%) with there being a considerable difference in the size of my 9th and 10th largest holdings. Since retiring the investment trusts have gradually taken up a bigger percentage of the portfolio.

These investment trusts on their own provide almost enough income to cover basic living costs (a key feature for me). They form my "core holding" in combination with three of the "big five" (Berkshire Hathaway, Canadian Pacific and Union Pacific - the weighted average holding period of these three shareholdings including some recent purchases is about 15 years). The other two of the "big five" are speculative recent purchases (Atlanta Braves Holdings and SL Green Realty).

The remaining 50% is a mixture of long-term holdings (primarily Bankers IT, Burberry, Diageo and Brookfield Asset Management) and recent purchases (I have turned over about 40% of my portfolio in the last two months).

[onslow]

These investment trusts on their own provide almost enough income to cover basic living costs (a key feature for me). They form my "core holding" in combination with three of the "big five" (Berkshire Hathaway, Canadian Pacific and Union Pacific - the weighted average holding period of these three shareholdings including some recent purchases is about 15 years). The other two of the "big five" are speculative recent purchases (Atlanta Braves Holdings and SL Green Realty).

Nice portfolio Salvor if I may say so! Quite a collection of railway companies though with CP, Union Pacific and Berkshire having BNSF ?

I'm planning something similar, i.e. having a third my equity portfolio in core holdings (similar names to your cores with the addition of LTI, RCP and potentially Fundsmith) and then another third in Berkshire, leaving the remaining "active" for me to manage.

I was hoping to get some BRK.A (it wouldn't be many!)as its for long term (Im mid 40s) but realised that unless I plan on voting at the AGM their are sometimes inefficiencies in the market where BRK.B can be trading slightly cheaper than it should compared to BRK.A, and of course liquidity benefits if I ever wanted to sell proportion of it.

[stevensfo]

When I was working I ran a very concentrated portfolio (11 companies on my retirement date, mostly small and medium sized oil companies like Soco) but after retiring in 2003 I started moved money into four core investment trusts and several large operating companies (not oil companies).

My portfolio is about 20% in four investment trusts (Caledonia, Finsbury G&I, Foreign & Colonial and Law Debenture), 30% in five operating companies and 50% in twenty-six other operating companies and four investment trusts. So there is a concentrated part (9 forming 50%) and a diversified part (30 forming the other 50%) with there being a considerable difference in the size of my 9th and 10th largest holdings. Since retiring the investment trusts have gradually taken up a bigger percentage of the portfolio.

These investment trusts on their own provide almost enough income to cover basic living costs (a key feature for me). They form my "core holding" in combination with three of the "big five" (Berkshire Hathaway, Canadian Pacific and Union Pacific - the weighted average holding period of these three shareholdings including some recent purchases is about 15 years). The other two of the "big five" are speculative recent purchases (Atlanta Braves Holdings and SL Green Realty).

The remaining 50% is a mixture of long-term holdings (primarily Bankers IT, Burberry, Diageo and Brookfield Asset Management) and recent purchases (I have turned over about 40% of my portfolio in the last two months).

Like you, I have received the message about the offer from Brookfield. BN to be converted into ..? I hold Brookfield in an ISA and don't really understand it, though it seems that it may be beneficial to USA citizens for tax purposes. I think I should just leave it. Am I missing something? Wouldn't be the first time!

Steve

[monabri]

Concentrated portfolios are great ..if you pick the winners. This years winners can turn into next years sinners.

[SalvorHardin]

Like you, I have received the message about the offer from Brookfield. BN to be converted into ..? I hold Brookfield in an ISA and don't really understand it, though it seems that it may be beneficial to USA citizens for tax purposes. I think I should just leave it. Am I missing something? Wouldn't be the first time!

Steve

Thanks for that! Until I saw your message I hadn't seen the offer to exchange Brookfield Corporation shares for Brookfield Reinsurance. I won't be doing anything, so I will be sticking with Brookfield Corporation.

Brookfield does love to complicate matters. With some Brookfield Companies being LLPs (and thus a tax nightmare for us British taxpayers) and Reinsurance being a "paired entity" to Corporation, I prefer to keep things simple (the share prices of corporation and Reinsurance are about the sam and will be so until the end of this offer - I'd rather stick with Corporation and not have decide to be invested in the reinsurance business).

I only hold shares in two of the Brookfield Group; Brookfield Asset Management as the manager plus Brookfield Corporation which is the assets which used to be owned by Brookfield Asset Management.

ISTR that Trisura has done well since it was spun off, but that was as an LLP which requires UK taxpayers to submit an annual tax return to the Canadian and/or American tax authorities because LLP dividends are treated as income from a partnership and thus self-employment. I run a mile from American and Canadian LLPs because of this. Whenever Brookfield has spun off an LLP I sell the shares as soon as they start trading.

[Lootman]

Like you, I have received the message about the offer from Brookfield. BN to be converted into ..? I hold Brookfield in an ISA and don't really understand it, though it seems that it may be beneficial to USA citizens for tax purposes. I think I should just leave it. Am I missing something? Wouldn't be the first time!

Thanks for that! Until I saw your message I hadn't seen the offer to exchange Brookfield Corporation shares for Brookfield Reinsurance. I won't be doing anything, so I will be sticking with Brookfield Corporation.

Brookfield does love to complicate matters. With some Brookfield Companies being LLPs (and thus a tax nightmare for us British taxpayers) and Reinsurance being a "paired entity" to Corporation, I prefer to keep things simple (the share prices of corporation and Reinsurance are about the sam and will be so until the end of this offer - I'd rather stick with Corporation and not have decide to be invested in the reinsurance business).

I only hold shares in two of the Brookfield Group; Brookfield Asset Management as the manager plus Brookfield Corporation which is the assets which used to be owned by Brookfield Asset Management.

ISTR that Trisura has done well since it was spun off, but that was as an LLP which requires UK taxpayers to submit an annual tax return to the Canadian and/or American tax authorities because LLP dividends are treated as income from a partnership and thus self-employment. I run a mile from American and Canadian LLPs because of this. Whenever Brookfield has spun off an LLP I sell the shares as soon as they start trading.

I held BAM for a few years but sold it because of all the financial engineering, corporate actions and tax complications. It was not a large position anyway and it annoyed me having to follow all these "clever" deals, games and machinations. BRK is my largest non-collective position and that will do for the space.

[SalvorHardin]

I held BAM for a few years but sold it because of all the financial engineering, corporate actions and tax complications. It was not a large position anyway and it annoyed me having to follow all these "clever" deals, games and machinations. BRK is my largest non-collective position and that will do for the space.

Yes the financial engineering and numerous quoted subsidiaries make it a bit tricky. I have a simple set of rules which I have followed for the 12 years I've owned the shares:

1) Only own BAM (changed to only own New BAM and Corporation when New BAM was spun off). This avoids LLP complications. Whilst some of the other Brookfields nowadays have shares rather than LLP shares, I prefer to ignore them.

2) Sell all spinoffs ASAP to avoid LLP tax horrors

BAM nowadays is a very different business from Berkshire Hathaway. It's basically the Canadian Blackrock, having spun off its assets into Brookfield Corporation.

[BullDog]

I have to say that my diversification attempts have almost without exception lead to poorer returns than if I had done nothing. Forays into infrastructure, renewable energy, small and mid caps, property, Asia have all been very bad ideas. Compared to just sitting on an already diversified UK or global investment trust or fund. Of course, it just demonstrates how hopeless I am at making investment decisions. I should really just sit and do nothing and harvest total returns from a basket of good quality ITs and/or funds and be satisfied. HTH.

[stevensfo]

I held BAM for a few years but sold it because of all the financial engineering, corporate actions and tax complications. It was not a large position anyway and it annoyed me having to follow all these "clever" deals, games and machinations. BRK is my largest non-collective position and that will do for the space.

Yes the financial engineering and numerous quoted subsidiaries make it a bit tricky. I have a simple set of rules which I have followed for the 12 years I've owned the shares:

1) Only own BAM (changed to only own New BAM and Corporation when New BAM was spun off). This avoids LLP complications. Whilst some of the other Brookfields nowadays have shares rather than LLP shares, I prefer to ignore them.

2) Sell all spinoffs ASAP to avoid LLP tax horrors

BAM nowadays is a very different business from Berkshire Hathaway. It's basically the Canadian Blackrock, having spun off its assets into Brookfield Corporation.

Well, I don't have a lot of BAM and BN but what I do have is in an ISA. No way could I get my head around the US tax rules. I did try reading about this on other forums, but there seemed to be no consensus apart from BAM being best for income. So as usual, I won't do anything! My favourite strategy!

Steve

[ADrunkenMarcus]

The remaining 50% is a mixture of long-term holdings (primarily Bankers IT, Burberry, Diageo and Brookfield Asset Management) and recent purchases (I have turned over about 40% of my portfolio in the last two months).

It's interesting to see you turnover such a large proportion. Do you mind me asking what it was - did you sell underperforming holdings and reinvest the capital? Did you post the details anywhere on the forums?

On the question of concentration, being concentrated is fine provided you're concentrated in the right area. I do think there is a difference between individual companies and collectives. I hold about 23% of my dividend growth portfolio in Murray International, which provides a high yield, conservative core for the portfolio; the next largest holding is a single company, MasterCard, which comprises about 13%, but then I have other holdings in the 8-9% range so their performance does make a solid contribution to overall performance.

My SIPP had about 50% in a single investment trust, so it is diversified in some ways but not others.

I'm not sure I'd want to hold 23% in a single company, but it does depend on the nature of the business. A few years back, AIM-listed DP Poland saw a 500% surge between 2014 and 2016 and became 21% of my portfolio. What I should have done at that time is trimmed it and perhaps put the substantial profits into a collective. The company has grown very substantially since then, but this has not been reflected in the share price as it derated and they raised equity (repeatedly).

Best wishes


Mark.

[SalvorHardin]

The remaining 50% is a mixture of long-term holdings (primarily Bankers IT, Burberry, Diageo and Brookfield Asset Management) and recent purchases (I have turned over about 40% of my portfolio in the last two months).

It's interesting to see you turnover such a large proportion. Do you mind me asking what it was - did you sell underperforming holdings and reinvest the capital? Did you post the details anywhere on the forums?

Most of it was the sale of a very big holding in Manchester United (which had almost doubled in nine months), plus moving several holdings into American REITs, Atlanta Braves Holdings (the Major League Baseball team) and Madison Square Garden Sports (New York Knicks, New York Rangers). I have bought and sold Manchester United shares many times in 2023 (my CGT calculation for 2023-24 is going to be a nightmare). My intention for the rest of 2023 and 2024 is to place no more than one or two trades a month (most of which will be investing dividends).

The Manchester United thread is here
https://www.lemonfool.co.uk/viewtopic.php?f=33&t=36724

I posted about some of my REITs in the link below. SL Green is still my biggest holding (offices in Manhattan); I've bought and sold these quite a few times recently (and unusually for me got it right every time). The share price has moved between roughly $20 and $42 in the last six months (currently $34.40 yielding 9.45%)
https://lemonfool.co.uk/viewtopic.php?p=608610#p608610

Even though I'm retired I can still afford to take fairly substantial risks with concentrated holdings because I live well within my means (a 50% fall in capital and income would have no effect upon my lifestyle). Currently I have 39 shareholdings, the ten largest make up 53% of the portfolio and 30% is in investment trusts (four of the ten biggest holdings are investment trusts).

[ADrunkenMarcus]

Thanks, much appreciated!

Best wishes

Mark.

[JohnW]

Diversification is a convincing strategy to reduce risk of capital loss. It mitigates 'all eggs in one basket' and encourages exposure to a wide range of asset classes - I think we all get that. But the contrary argument is that the greatest gains for a particular period of time arise from a narrow selection of markets and individual stocks, meaning that diversification acts against the possibility of greater success through concentration.

So I'm pondering whether to consciously blend the two approaches in a pf. For example, to adopt a more general geographic and market sectors approach for a chosen diversified % of pf; and a specific risk-exposed approach for the balance.

For the 1/3rd balance, I'd perhaps concentrate risk on IT/Comms, Defence, rare earths, perhaps bio/healthcare.

You’ve acknowledged that the 1/3 part will be taking more risk than the 2/3 part which is invested in the whole market and is therefore taking only market risk. The question then becomes: now I’m taking more risk, should I expect to get more returns? To answer that, imagine not just your 1/3 investing efforts, but the similar efforts of all others who choose the same approach; in total, you all can only get market returns (some greater at the expense of those who get less) because everyone in the market in aggregate can only get market returns. So, putting aside for a moment whether you’re better or worse than other active investors, your expected return from your 1/3 is market return, but you’re taking more risk. It’s a bad deal.
For it to be an improvement on your 2/3 strategy you have to imagine you’re smarter, more insightful, better resourced for research than the professional fund managers you’re competing against. Are you? Here’s a clue: most motorists think they’re a better driver than the average.
Perhaps an alternative for getting better than market returns without taking disproportionate risk is to borrow to invest in the whole market.

[flyer61]

Here you go Peter1B1

Two holdings covering circa 280 Companies.

Fundsmith - Quality!
VMID - FTSE250ETF

50 per cent in both and jobs done! There is a case to say this is actually over diversified.....

If that doesn't float your boat go for Salvors 4 core ITs as the basis for your portfolio, certainly 50% of it....make sure you have your 'thinking long term' hat on when you do decide.

your welcome..