How many stocks are right for me? It's a decision that many investors struggle with. If you own too many stocks, your returns could be diluted and make it difficult to keep track of all your holdings. If you own too few, a bad day for one or two stocks could make you lose sleep.
What's the "just right" number? As with many things in investing, it depends. In this Motley Fool Live video segment, originally recorded on Jan. 14, Fool.com contributors Jason Hall and Brian Withers share what's right for them and how Withers' number has changed over time.
Jason Hall: Well, that's exactly, I think why we're doing this session, right? Because this is something that I see questions on "The Wrap" about this a lot. People, especially newer investors, trying to figure out how many stocks is too few and how many stocks is too many. The general answer is it depends, right? We're going to talk a lot about that. I think Brian, just as the starting point here to kick off what we're going to talk about, describe a little bit about your portfolio. You've put together some great slides, you can do a screen share. Talk about how your portfolio has evolved over the years from one that was closer to mine, where I own well over a 100 individual stocks. Your portfolio now is less than two dozen. So talk about that. If you want to just share that part.
Brian Withers: Yeah, that'd be great. Over time, being a Fool member and actually being a Fool One member since 2014, I've had access to tons of great recommendations. Over the years, the number of stocks I've owned has approached 100. In the 2016-2017 timeframe, I don't know if it was conjecture or just looking at my portfolio and have been doing it for about a decade or so but I then thought that there was a better way for me. I want to share what I've done over the last few years and how that's materialized. This was my portfolio in 2017. My largest stockholding was Amazon, up a little bit more than 15 [% of my portfolio]. This [the vertical axis] is the total percent of the whole stock portfolio. MercadoLibre was in the high single digits, and Starbucks was right around 5% and all the rest of them were smaller. Over time, sometimes I had to scratch my head and go, "Do I own that, or not?"
Hall: This was 2017, you said? It's three years ago.
Withers: Yeah, this was 2017. Let me click on that. There we ago. It was a total of 82 stocks there. You might not be able to see the tickers, but that's not really important. It's just to see that there's a lot of them and there's a lot of them that the bars are really kind of what I noticed was that the amount invested in the ones in the tail were pretty small. I always focused on my top 10. My top 10 was 52 percent of the overall, so I felt like I was pretty well weighted, and a majority of my wealth was in a few stocks that I could follow really closely. But the number of positions that were less than one percent of my portfolio was 53. I was like, oh, that's not too bad. It only makes up 17% of the portfolio. This was one where the thought process was spreading your bets. But if you look at a picture, now I'm going to represent the 53 graphically. That's the 53. When you do that, to me, that's like, wow, that's a big chunk of the portfolio.
Atlassian, which I've talked about, was number 59 in 2017. We did a deep dive on Atlassian last week. It's one of my favorite holdings, which you'll see a little later. It's a much bigger position. If I was excited about Atlassian, and say it doubled or even tripled, it would still be in this long bar of really small impact to my stocks. I noticed that there were some winners down there and there were some ones that I wasn't super confident about. In 2017, I started down the path just trimming out things. Under Armour was one of my large positions, you can see it here. It underperformed significantly in 2016 and 2017. In fact, I think 2016 I lost to the market because it was my number one position. [laughs] That scarred my perspective and my thought process. I wanted to get away from companies that needed a retail presence or a physical presence, more of a physical brick-and-mortar presence to sell our products, or make their revenue. That was my first striving effort [to trim down my portfolio].
What I've done, and I've gone way beyond that since then. This is the 82 that I had in 2017, and the number that was less than 1%. Over the past one, two, three years, I've trended down slowly over time and moved that money up, basically thinking about moving things from these small, selling out in the small positions and moving them to positions that I had higher confidence in. Then sometime in 2019, similar to Brian Feroldi and Brian Stoffel, I put a checklist together that really defined my process in what stocks that I liked. That helped me trim it even more. Now I'm down to 21. I'm happy to add things [new stocks], but every time I look at adding something, I look at what stocks did I have and decide whether, is this better than one of the ones that I already own?
Hall: Brian, I have a quick question here in regards to that, because I think this is an important part of how people structure their portfolios. You're not a lot older, maybe a little bit older than me, but you're in a semi-retired state, but also earning income as well. My question is, are you at a point where you're still adding any money into your investing accounts?
Withers: That's a good question. Yeah. When I left corporate, I'm 53 today, will be 54 a little later this year, and we were at a position where the job that my wife and I have cover about two-thirds of our expenses over the course of the year. That allows me to withdraw like 1-2%, looking at the 4% rule, which is more like the 5% rule. The rule of thumb that says you can withdraw four percent from your nest egg and be able to make it through an average retirement. We wanted to certainly pull less than that. As well, because potentially our retirement is going to be longer than 30 years, or the semi-retirement state. Yes, I don't have any new money coming in. As I've gone down, the decisions to sell and which ones to keep have been harder and harder and harder, [laughs] which is a good thing. It means that I'm left with companies that I feel really strongly about, and have a tremendous amount of conviction, and know very well. Back in 2017 and 2018, if I needed to raise money to add to a new position or sell something, it was a pretty easy decision because I was still trimming my portfolio quite a bit.
Great question. I think it really depends on what stage of your life you're in as well. When I was working, I didn't have time to dedicate to the stocks as much as I do today. Maybe having more stocks at that point in my life, it's what I did. It's what felt right to me. This is just a little bit just comparison. You saw some of these earlier numbers. The value of the one-percenters have gone down considerably. Now this is something, as you get less stocks, the average position size gets much larger. This is four times as large as the positions that I had in 2017. That's something that I've had to get comfortable with, and I am because these I feel like are my 21 best ideas right now. Interestingly enough, the largest holding is about the same. It hasn't changed considerably in the side. This is my portfolio today. This is [my] stocks as of yesterday. You can see Atlassian, which remember was a 0.2 [percent] position before, now is more like a five percent position and has much more. If it doubles from here, that's driving considerable impact to my overall portfolio.
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January 30, 2021 at 08:00PM
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