It’s surprisingly easy to end up with a messy portfolio, especially if you tend to buy holdings based on hunches rather than implementing a specific strategy. And when you have too many holdings that don’t work well together, it becomes harder to keep track of them and portfolio performance can suffer. However, if you find yourself in that position, it isn’t necessarily complicated to remedy it – you just need to spend some time getting rid of the assets your portfolio doesn’t need.
How many are too many?
How many holdings you should have depends on whether you invest in single-company stocks or funds, and on how much time you can dedicate to investing. Laith Khalaf, head of investment analysis at AJ Bell, suggests that a portfolio of single-company stocks should comprise 20 to 25 holdings as a maximum. Once you are above that threshold, it is more time-consuming. “If you get up to 50 or 60 holdings, you are essentially replicating the job of a professional fund manager,” he notes. “If you’re really into your investments, have a lot of time to dedicate to them and a lot of money to invest, that’s absolutely fine – as long as you are able to keep on top of all the different holdings.”
With funds, you can keep things much simpler and even use just one tracker or one multi-asset fund, although the latter is a more expensive option. But Khalaf cautions against using just one active fund, because it leaves you exposed to its manager’s potential underperformance.
Rob Morgan, chief investment analyst at Charles Stanley, says that if you like selecting funds for specific geographies and sectors, you could hold between 10 and 20 funds. You should still have an idea of what the portfolio of each fund looks like, so 20 funds is quite a lot of underlying holdings to track.
Khalaf also likes a “core and explore” approach, where you hold a core of diversified funds alongside a few single-company stocks. This means that you have both a diversified and professionally managed core portfolio and a smaller section to build your investment experience and exercise your views on the market.
Duplicating the same holdings across different accounts, for example an individual savings account (Isa) and self-invested personal pension (Sipp), saves you time in terms of the overall number of holdings you need to get to know. But make sure that duplicated holdings fit with the strategy of both accounts because they might be different. For example, some investors might have a longer time horizon with their Sipps than their Isas. Also, be aware of concentration risk across the whole portfolio.
Issues with a complicated portfolio
Many investors fall into impulse buying – purchasing holdings based on trends that are in vogue, such as artificial intelligence earlier this year – rather than focusing on their own overall asset allocation or strategy. And they often end up with a less than cohesive portfolio that has far too many holdings as a result.
This throws up a number of problems, including that it takes a lot of time and effort to keep track of them. Poppy Fox, investment manager at Quilter Cheviot, also highlights “diworsification” – a term originally coined by fund manager Peter Lynch. He suggested that excessive diversification can lead to inefficiency and underperformance as resources, time, and energy are spread too thinly across too many investments. And having lots of holdings doesn’t necessarily mean great diversification, either. It’s easy to end up with multiple funds that resemble each other. Also, investing in many different active funds covering the same geography or sector can result in a portfolio that produces returns similar to a broad passive tracker fund but with the higher fees of many active managers.
Also, consider the balance between your holdings. Avoid excessive concentration: if you have a portfolio of single-company stocks, monitor ones that account for more than 5 per cent of the portfolio closely, and if their value rises to account for 10 per cent of the portfolio that’s a potential red flag.
But positions can also be too small. Darius McDermott, managing director of Chelsea Financial Services, says that investors often make the mistake of holding one very large fund which perhaps accounts for up to half of the portfolio and on top of this “a load of smaller holdings which are almost immaterial”.
“The danger of having too many smaller holdings is that you forget about them and they end up being a drag on your portfolio, as you [continue to hold] underperforming funds where managers may have left or retired. Or you have tiny positions which have no meaningful impact on the portfolio,” he says.
Having a large number of holdings also makes tweaking the portfolio fiddlier and potentially more expensive, depending on your platform’s dealing fees. To maintain your strategy, you need to rebalance your portfolio fairly regularly, trimming the holdings that are performing better and adding to those that are not doing so well. Otherwise, you’ll end up running your winners, explains Morgan, which can work for a while but also creates additional risk that you had not planned for.
Review your portfolio
If you think that your portfolio has become too broad and want to slim it down, it makes sense to do a full review. Set some time aside to look at all your holdings together – it is best to get it done in one go and get the full picture rather than chipping away at it gradually.
Start by setting yourself a target, both in terms of the number of holdings you are aiming for and the strategy. Then figure out which holdings you really want to keep and which ones you have less conviction in. “You need to determine the level of confidence you have in those investments generating returns, bearing in mind that you might want to throw in new investments as well,” says Khalaf. “You are essentially testing all of your holdings against each other and against all the other investment opportunities.”
If you have a funds portfolio, start by grouping together those that serve similar purposes, for example, by asset class, geography and sector. Then pick the ones you prefer in each category. You could look at features such as their track records, fees and underlying investments.
Alternatively, you could begin by assessing your really small holdings and either increasing your position in them or getting rid of them.
Whether a holding is nursing losses or sitting on gains will inevitably be on your mind when deciding what to sell, but don’t let this sway you too much. Remember the concept of sunk cost fallacy: if an investment is underperforming, you may be better off letting it go and putting the money somewhere more profitable rather than waiting indefinitely to get your money back.
Another way to simplify your portfolio is to invest a portion of it in passive funds, particularly ones focused on large liquid markets, which active managers find difficult to beat. Holding a passive investment saves you from having to monitor its manager’s performance, although you still need to pick the best tracker fund or exchange traded fund for your circumstances.
Source : InvestorsChronicle