Risk Management and the number of shares in your portfolio

[john_1]

Tradiional veiws are that you should have a handful of shares in your portfolio in case there is a sudden shock to the system, also to try catch as much as you can of any upside gains....But... Do you think that in the case of a crash were the average share loses 40% in one day you are better of with a diversified portfolio of 20 shares or a holding of 1 single share. Also does holding 5 shares improve your returns vs holding 10 shares or are you better off holding just 1 quality share at a time in your portfolio.

[DCTrader]

Depends how you chose that 1 share...

[john_1]

True, lets assume, its a star performer.

[saash]

Like ACL

[john_1]

exactly. But lets move on with the the discussion..

[Harathke]

Diversification does lower your risk, but it also dilutes your returns. Perfect diversification basically tracks the market and is no use to those wanting to outperform. A study done on the US markets showed that a portfolio of 20 shares spread across all the sectors can be considered sufficiently diversified to track the market in all material respects. The problem with 20 shares is that you will be paying brokerage 20 times... The more shares means the more "cost to invest" that you are paying the lower your margins or returns on the investment. In terms of the JSE, I feel that portfolio of between 10 to 15 shares is sufficiently diversified to buffer itself against shocks. Obviously, the more you wish to outperform the market, the less shares you hold in your portfolio and the higher their weightings will be. Thus, in answer to your question about how many shares to hold to protect against market shocks...well, it depends on what the origin of the shock is. If the shock is general, then hold less shares, but weight your portfolio towards defensive sectors with low beta's. If the shock is specific to a sector or industry, then hold a more diversified portfolio...but under weight it to the sector you anticipate the shock to originate from (e.g. subprime = financials).

[#7]

I balance the number of shorts and longs that I hold. Any global market jerk down will not influence me that much, as I my shorts will gain. Its a play on the strength of stocks compared to one another. Makes me sleep easier at night.

[Stij]

Ja but then surely your portfolio does not benefit from any market-wide rise in prices either as the losses on your shorts will cancel out the gains on your longs - lower risk, lower return.

[barry_1]

In my portfolio at the moment i have seven and Naomi has five shares.I in no circumstances hold more than fifteen shares at any time at most,otherwise as Chartist describes it i might as well have monkeys, err sorry i mean fund managers running my portfolio.If times are bad as now then i 'll make use of alerts and stop-losses to control the down side.

[DCTrader]

Here's the problem with that theory john... "it's a star performer" entails hindsight, which we know is 20/20 vision. If I knew a single share was going to be a "star performer" before I decided to diversify or not, why would I even consider diversification? That's the whole crux of diversification... it comes down to the old risk/reward relationship and future security. You don't know anything beforehand. If you have a basket of 50 eggs vs. 1 ostrich egg... which one could you sell for a higher price? Well if you drop 20 eggs on the way to the market, you can still 30 (and the basket). But if your 1 ostrich egg has gone off by the time you reach the market... well then you're left with egg on your face!

[Stij]

Me, I have a monthly debit order going into Satrix 40 which is at about 85% of my portfolio and I hold two share installments on BIL and SOL with the remaining 15%. I'd probably aim to have up to 3 or 4 "risky" share investments (using geared products like installments) just to protect against any one trade failure but not to diverify to the extent that you're tracking the market - Satrix 40 takes care of that.

[#12]

No my friend. There are sectors that are falling through the floor - remove resources from the ALSH index and see what has happened over the last year. Shorts are a very profitable game at the moment - even with resources rising. There's a female fund manager interviewed in stock market wizards who runs a fund that only shorts. She has made spectacular returns in years that the overall market has shot the lights out on the upside.

[Brazen]

My long term portfolio which is nearly 11 years old comprises 10 shares at all times. I do change shares from time to time, but its not a portfolio I really tinker with on a short term basis. Right now its MTN, SOL, AGL, BIL, SBK, OML, REM, RCH and GFI. And sure, some have done way better than others but if I look at what I had 11 years ago and what I have now it's worked better than almost anything else I could have done.

[DST]

Rigid yet forgiving. Like the underwear policy of a "grande dame".

[Brazen]

Don't knock support pantyhose til you've walked a mile in em . . . and just for a laugh guess what I jettisoned last year to make way for GFI . . . . SAB.

[SimonPB]

you sold beer to buy gold !!! brazen I don't know if we can allow you on the forum after that ...

[Brazen]

I hang my head in shame and whip myself with a wet towel everyday. . . now I must just think of a punishment.

[john_1]

out of interest.Brazen. How much gold jewlery has Gravy bought you in the last 3 years. Now ask yourself how much beer has he bought in the same time frame....See this is my point about having a bunch of shares..If you could hold only one share would you have ever bought GFI to start with.

[john_1]

OK OK I promise never to mention GFI to you ever again. Still I have always been struck by the fact that it only takes 5 trades of 15% with 1 share to double your money but if you hold 10 shares that means you have to make 50 trades of 15% to double your cash. If you take the veiw that you are most at risk at the point of entry ( furthest away from both stop and target) 50 trades increase your risk of failure, and has no benifit in the case of a crash. But that just how my brain works and to be honest I know I does not work so well a whole lot of the time.

[john_1]

So can some one please explain to me how/ why Diversification deduces risk??