Avoid Diworsification

Diversification is key

This is the conventional wisdom, spread your investments to reduce risk. No doubt, it is a proven working formula. Few people are interested in placing all their eggs in one basket. But, Warren Buffett says those who diversify has no clue what they are doing. I am not in a position to argue with the Oracle of Omaha, he has made billions of dollars doing what he know.

Diworsification

Too much of something is a problem, just as too much diversification can defeat the purpose of diversification. Obviously, you are chasing the noble goal of minimising risk, while you are it, you are thinning out your investments! In the process, the risk and the returns just cancel each other out, making the whole process a pointless exercise.

Not all is lost though, if you want to own too many stocks, just buy an ETF Bro. An exchange traded fund (ETF) is a diversified tradable security, some of the ETFs are even less volatile than individual stocks. Even there, be careful not to buy overlapping ETFs, always remember to check the top 10 holdings of each ETF you buy. Okay, I am not here to talk about ETFs. The idea of this Blog came as I struggled to shed off stocks in my portfolio. It is over-diversified, at some point I had 35 stocks, I should have just bought the Top40 ETF. I am now sitting at 21 stocks, I shed 4 stocks this morning, all good stocks (in the money).

But why cut profitable stocks? Well, some were near 1% of the total holding, even if they doubled, the effect would have been insignificant. Eish. Yeah, it sucks and there is no guarantee that the stocks I topped with the capital will perform better than the stocks I sold. 

How did I get here?

I use a cool trick called position sizing to manage risk. But I just effed it up. Instead of buying the large positions I was supposed to buy, I chose to play it safe and bought smaller positions. Eventually all these small positions became too many small positions. The painful part is that most of these positions were up over 30%, not a large figure but we are talking stocks here, few stocks double up in 12 months. It is these returns that made me to hold onto these stocks, but in the end I accepted that I was working backwards. 

Also, I sell a portion of the position whenever the stock advance by a certain amount, in line with my strategy. Once I locked in some profits I used that capital to buy new small positions. I did not wait until I had enough capital to buy a large positions.

Solution

I need to remind myself that I use position sizing to manage risk. I must accept that I will miss many good setups as the capital will be tied in few large positions. But, I will be rewarded handsomely by those stocks that will deliver above average returns! I have already witnessed this from other Traders, I have also witnessed it in my eToro account. I have a 75% Apple position on eToro that does the heavy lifting in the portfolio. In the end I must decide if I want to own a lot of companies or if I want to make money, as and when the market allows. I choose money! Currently the largest position on the EasyEquities account is 14% of the portfolio, and the smallest is none other than Aveng (1.5%), but this is a speculative position.

Less is more. "Put all your eggs in one basket, and watch the basket."