Many ways to skin a cat. No one "right way" to do it, but plenty of wrong ways.

From what I've read and experienced there are 3 camps for 'starting off' bearing in mind the weightings will change as the investments grow. Hopefully in 10 years you have a 50-bagger and it's a much bigger portion of your holdings than you anticipated but a good result nonetheless.

1) Concentrated to heavily concentrated: Under 10 holdings, either split relatively evenly or large positions making up 20-30% each with a few more speculative positions under 2.5%

2) Moderate diversification/ ETF strategy: Probably 15-25 holdings with nothing much more than 10% for higher conviction ideas. This could also be a heavy ETF portfolio between 2-3 ETF's (Say, global ex AUS, AUS/ASX, NDQ) and a few satellite holdings in individual companies you have an edge on.

3) Wild diversification, or letting your winners run: This is what I believe people like Howard Marks and Peter Lynch do. But bear in mind they have extraordinary amounts of capital to put to use. This is buying up most ideas as they come. Taking advantage of every good opportunity that presents a good risk/reward asymmetry. This doesn't mean buying every stock, and usually involves waiting for a fat pitch but it involves far less selling and really does need consistent inflows. Basically, the good companies that make exceptional returns naturally grow to be an oversized portion of your holdings to an extent that the smaller ones don't matter if they halve or go to zero. We're talking about hundreds to thousands of positions here.

I don't believe there is much benefit to diversify this wide with a chunk of capital you aren't looking to add much to proportionally in the future as it would take some astonishingly high returns to turn a profit. If you had $100k in the market in 100 different companies ($1,000 each) you'd be looking at $20 per trade (in and out) so an extra $2,000 off your profits and then even if half of them doubled while 30% had big losses and 20% had moderate gains you would have a hard time making consistent returns. Buy some ETF's instead lol.

Just thoughts...

Side note, for some reason I didn't at first take in all of your question (the evidence portion)

My 2c would be that any evidence in the form of a chart, graph set of published statistics would be partially biased to favour a particular opinion or only be a backwards looking set of information which may or may not include the whole picture.

@GazD

There was a paper from 1968 which sort of became the standard justification for the 15 stock portfolio.

“Diversification and the Reduction of Dispersion: An Empirical Analysis.” by J. Evans and S.H. Archer

Different studies come up with different numbers (and you also have to factor in that having, say, 15 lithium miners isn't very diversified. ie. Correlation matters). But the general relationship looks like this:

In other words, there are very rapid diminishing returns, and the first 10 stocks provide you with most of the benefits of diversification.

I also think too much diversification is a bad thing -- what Buffett calls di-worse-ification. While more stocks lowers your risk, it also lowers you potential returns. It's very hard to beat the index when you own every stock in the index!

It's also a lot of work to stay on top of a portfolio containing dozens and dozens of companies.

As always, each to their own, but I try to have >80-90% of my portfolio value in just 10 stocks.

I've always liked the quote from Andrew Carnegie:

"The concerns which fail are those which have scattered their capital, which means that they have scattered their brains also. They have investments in this, or that, or the other, here, there and everywhere. “Don’t put all your eggs in one basket” is all wrong. I tell you “put all your eggs in one basket, and then watch that basket.” Look round you and take notice; men who do that do not often fail. It is easy to watch and carry the one basket. It is trying to carry too many baskets that breaks most eggs in this country."

Love this @Strawman

i note that they randomly selected stocks in order to generate the model described above.

my thoughts go to how ‘random’ our selections are (ie more likely quite thematic for most of us whether that’s SAS, micro cap, mining etc…

I wonder how these themes might affect the optimal number of stocks in a portfolio. I suspect (purely hunch) that strawpeople who tend to invest at the micro cap/small cap end of the market would possibly generate a higher base number of stocks as optimal than was generated in the above study… that said pure speculation and not a lot of practical extension I don’t feel.

think this is a case of you do you!

I found those examples (and their classifications) interesting @NewbieHK - I think HVN is a very interesting one. A lot of their value is underpinned by commercial real estate, i.e. owning the land and buildings, which is something that can't be said for all retailers - many just lease rather than buy. Brickworks (BKW) is another one, although they have many strings to their bow, not just brick and paver production and sales, plus land holdings, they also have a JV with Goodman Group to develop much of that land, plus Investments (including in SOL, who also own a good chunk of BKW in a cross-ownership structure that would likely never be allowed to occur nowadays, but also in a number of other listed companies).

Here's what the Brickworks Website says about their Property Division: The Property division was established to maximise the value of land that is surplus to the Building Products business. Operational land that becomes surplus to the business needs is transferred to the Property division where it is assessed for optimum land use. In some cases, land is rezoned to residential and sold. Alternatively, the land is rezoned industrial and transferred into the Property Trust and developed, creating a stable, growing annuity style income stream. The Joint Venture Industrial Property Trust is a 50/50% partnership between Brickworks and Goodman Industrial Trust. Over the past decade it has grown significantly and now has a total asset value of over $1.7 billion. After including debt, Brickworks 50% share of the Property Trust has an equity value of $633 million. In addition to the Property Trust, the Company holds around 3,750 hectares of operational land and 370 hectares of development land. The company also holds 2,400 hectares of land in North America.

The Harvey Norman Property Portfolio is described here: Property Portfolio – Harvey Norman Holdings

They say: The consolidated entity’s property portfolio provides financial stability that is unrivalled in the Australian retail industry. It strengthens the balance sheet, provides opportunities to leverage economies of scale and allows the consolidated entity to capitalise on investment opportunities as they arise.

Property ownership also delivers operational benefits, enhancing the ability of proprietors to respond to market trends with agility, and is supportive of the consolidated entity’s omni channel strategy. It also enhances negotiating power in the property sector. The consolidated entity seeks to attract superior third-party tenants to co-locate with proprietors within its complexes. The ownership of high-quality complexes with Harvey Norman®, Domayne® or Joyce Mayne® proprietors as anchor tenants, delivers a steady and reliable income stream to the consolidated entity in the form of market rents and outgoings.

The consolidated entity’s property portfolio remains fundamentally strong, with high occupancy rates, growing revenue streams and strong potential for capital growth. Operating profits have been robust as the consolidated entity continues to focus on improving revenue streams and curtailing operating costs.

The property portfolio was valued at $2.99 billion as at 30 June 2019, representing over 62% of the consolidated entity’s total asset base.

The result before tax generated by the property segments were $204.68 million for the year ended 30 June 2019.

The Harvey Norman property portfolio consists of:

• 94 Harvey Norman®, Domayne® and Joyce Mayne® owned complexes in Australia, inclusive of property assets held under joint venture agreements;
• 18 owned Harvey Norman® company-operated stores in New Zealand, 5 owned Harvey Norman® company-operated stores in Slovenia and 1 owned Harvey Norman® company-operated store in Ireland;
• the Administration Building in Singapore and the flagship Space showroom in Bencoolen Street, Singapore;
• owner occupied land and buildings in Australia.

I have owned both HVN and BKW in prior years, mostly for their resilience and dividends. Not currently holding either. As a general comment, I tend to prefer diversification to a highly concentrated portfolio. That is mostly purely due to risk management, something that has probably been adequately covered in this thread already. It is particularly important when you are investing on behalf of others, even if that only means that your family is going to rely on the income generated by a portfolio in your retirement years.

And yes, I like to have a nice mix of exciting stories, up-and-comers, the occasional long-shot or turnaround story, but with a good backbone of high-quality, large, solid, profitable and reliable companies that underpin the rest of the portfolio. But I do run a few different portfolios, and each of them is structured differently, depending on the purpose of the portfolio and the associated rules I have for that portfolio. For instance, my smallest portfolio is one that I "manage" for our two children. I say "manage" but there's very little management. It currently has only two stocks in it, so you might think it's very concentrated, but those two stocks are FGX and MGF, so the Future Generation Investment Company (Australian) Fund and the Magellan Global Fund. Those two funds are both quite diversified in what they invest in, and FGX is VERY diversified because they outsource the management to a whole bunch of boutique Australian fund managers who each have their own collection of investments that they have chosen to put their share of FGX's FUM into, so there's massive diversification even though there are only two stock codes in that particular portfolio. It's like investing in ETFs but with the benefit of active management. In Magellan's case, MGF's recent performance hasn't justified their fees (i.e. higher fees than what ETFs charge, and they've recently provided lower returns than their benchmark MSCI World index) but I think Magellan will hit their stride again soon enough, as they did in their first 5 or so years. In FGX's case, they do not charge any management or performance fees. All of the fundies and other service providers provide their services to FG for free (pro bono) and FG donate 2% of their FUM each year to a variety of Australian children-focussed charities. It's a good deal all around. Their performance hasn't always been wonderful, but they have their moments (good months or quarters) and I think they'll do well as in investment over 10 years, which was the timeframe I was targeting.

As I said, I think diversification is more important - for risk management - when you're investing on behalf of others (or where others are going to rely on the proceeds of those investments). But I also understand that the best results tend to come from very well structured highly concentrated portfolios. Horses for courses.

Hi @Bear77 yes I also use HVN as a property play. I have looked at numerous shares to get exposure to the commercial property sector but the issue for me was the unfranked dividends.

HVN has allowed me to get market beating dividend returns whilst get exposure to retail and property albeit slightly indirectly by holding HVN. I suppose you could say it’s almost two shares (retail / property proxy) for the price of one further increasing diversification.

With all your different portfolios are the stock selections in the different portfolios influenced by what you hold in another?

I guess so, @NewbieHK - but then again, not too much. Each portfolio has a purpose, i.e. a desired outcome which dictates what sort of investments (companies, funds) it can contain, so there is certainly some overlap, especially at the large high-quality end of the market, but only when that company or fund is a good fit for more than one portfolio. So I guess what I'm saying is that there is overlap, but each position in each portfolio is there based on its own merits, not because its in another of my portfolios. The exception would be my virtual portfolio here, in which I like to hold some of most of the companies I hold IRL, but there are exceptions there as well. I don't hold FGX or MFG in my SM portfolio, and I don't hold a small handful of companies that I think are fully priced at current levels but still serve the desired purpose in my RL portfolios. I held Codan IRL for years, but only started adding it here once the share price had halved from its highs. There are also a few other positions in my SM portfolio that I bought at much lower levels IRL. MAQ is one example. ARB is another.

Depends on your risk tolerance.

I've become more comfortable with concentration with a more secure income. Concentration is what builds seriously big wealth.

Diversification affords protection on the downside. 15-20 stocks gives you most of the benefit of diversification. I've had 50+ at one stage (basically my own ETF when I was starting out) which was simply too many to keep track of, and with the COVID crash, many became holdings of less than 1%.

If a stock that is about 1% of PV doubles, then it's going to be 2%. Nice, but hardly life changing.

If a concentrated holding of 10% or 15% doubles, then now we're talking serious numbers. If it then doubles again, and again after that, well, you've just about doubled your portfolio on that one stock alone over 5+ years. The only way to get this right is to know the stock well, and to maintain conviction if you believe you are right.

I'm aiming to trim holdings to 10-15 stocks overall. Currently at 35, which is still too many to keep track of.

Thanks to @nerdag @Lambo and @Rudyboy for your responses. Stoked to have such an engaged bunch of clever people.

@Rudyboy i see myself very much as a long term investor. My approach (at the moment at least) is to buy a large number of stocks I believe have great growth potential and then think long and hard before selling. Unfortunately this does lead to over diversification but if it leads to one or two 100 baggers over my investing career it will probably give me the returns that @nerdag is talking about…

I see where you’re coming from about the return for a successful pick being diluted if you are overly diversified though.

the other nod I would give is to Anirban Mahanti who I would paraphrase as ‘start small and add on execution’ and also ‘don’t sell but rather add to your high conviction picks and let the others become irrelevant’

I went through a phase of placing "small" orders to test the waters and then look to add more funds in order to build up my concentration on higher conviction ideas.

Problem was, I ended up with over 70 holdings and the paperwork was a nightmare. Lots of chopping and changing as well. So I would check in every few days and most days there was a move either up or down 1-1.5% either way. (whole portfolio) But that was swings of 10% up and 11% down then 5% up another one 2% down on some others. Wild on an individual level but smoothed out. So diversification works, but there needs to be a good strategy. Don't just do it for the sake of it.

Over the past year, I have brought that down significantly to around 25 (still high diversification, I know) but am muuuuuuch more invested in the better ideas. Close to 10% each for the top 5 then the rest are spread out still quite thin. I'll get there eventually. Usually sell off something that I've lost hope for and pour that money into one of the other larger holdings.

Fun thing to note, I've actually experienced much of the same moves. Often between 0.5% to 2% fluctuations but I feel like I'm gradually building up a much wider margin of safety on those top 5 ideas rather than risking a 40% drop on several <$3000 speculations. Bear in mind, quite a few of those speculations have been appropriately sized for their risk/reward chances. A bunch have doubled and tripled in short periods of time but heaps have gone well below 50% so net/net probably not much better off than if I'd just been more sensible in the first place.

Also saves scrolling through two pages of ticker codes going "wait, what do those guys do again?"

@tbra97 I’ve been taking this approach to an extent - buying a very small starter position in businesses of interest - more to place a marker on the business to ensure I watch it. And I’ve got the exact same issue. 60 stocks in the portfolio IRL… is that a problem? Well I’m not sure it is tbh. Perhaps that’s just because I’m not there yet but given I’m actively trying to be a slow seller I only really need to monitor the execution of the business not every last detail.

I suppose when I’m honest with myself part of my overly diversified approach is that I’m hoping to spread my chips across enough interesting opportunities to catch a few 100 baggers… is this right or wrong? Time will tell and I wonder if my approach will evolve.

speaking to some of you I may be speaking to my future self…

@GazD, hoping for a 100 bagger is one way of doing it, but what are the chances? I suspect much less than for a few 10 baggers.

There might be more than one way to skin a cat, but why go to all the effort to be your own ETF when you buy an ETF for a lot less time and energy?

Put it this way, if you have a 1% position become a 100x, you've only doubled your money at what odds? If you've had a 10% position hit 10x, you've achieved the same thing at what I would say are considerably better odds.

And if that 10x position then goes onto 20x, 30x, then 50x or more, that's when you build yourself life changing wealth.

These are just my personal thoughts..

I think ultimately being concentrated will result in greater returns but as retail investors it is hard for us to have such high conviction to be concentrated in only a few businesses.

Being diversified would cap some upside potential but would also limit downside risk.

It would really be up to the individual to decide how far up the risk/reward spectrum they would like to invest in and then decide whether to be more concentrated or diversified.

In my personal portfolio I have around 20-25 companies plus another 10 on a watchlist. This is on top of a core portfolio of ETFs. I believe this is quite diversified already. Anymore stocks and I’d struggle to follow all the companies. Any less and I’d be worried that I’d have too my risk in a single company.

its a fair question about what are the chances of a hundred bagger… I don’t know but there are literally hundreds of businesses that have done it before. Clearly the more stocks you own the higher your chances and the less you sell the more likely.

the other related point is that everyone from @Strawman to Scott Phillips cite their biggest regret as the winner they sold too early… does concentration predispose to this error?