By Chloe Lutts Jensen
Editor of Investment Digest and Dividend Digest
How Much Time Do You Spend on Your Investments?
Concentration vs. Diversification
How Many Stocks Do You Own?
A couple of weeks ago, I asked you how much time you spend on your investing. I was prompted to ask by a reader named Lois who said she loves investing and thinks it keeps her brain sharp, but is trying to spend less time on it. She asked:
“Now in my mid 80s, my problem is how to spend less time on all this as I realize there are more important things in life than spending so much time keeping up on investments. I could go more into mutual funds than individual stocks but that seems so boring.”
Since you’re a reader of Cabot Wealth Advisory, and possibly also a subscriber to one of our premium services, you’ve probably thought about this question as well. Maybe you’ve taken charge of managing at least some of your money yourself, perhaps because you think mutual funds are “boring,” like Lois, or because you realized that money managers and brokers don’t always have your best interests at heart. So you’ve decided to dedicate some of your personal time and energy to managing your money. But the question of how much time and effort it should take up is a good one.
I got a response to Lois’ question from a reader named Dave, who wrote:
“Interesting article. My hunch is if you surveyed investors, you would find people who are building their nest egg probably don’t spend as much time as they want watching their investments while retirees probably feel they spend too much time watching their nest egg—due mainly to the market meltdown in 2007 and the revelations that followed concerning Wall Street excess, Bernie Madoff and other fraud perpetrated, retirement investor’s will never have a level of trust of any service.
“Me personally, I spend at least several hours a day managing investments. I like it and I have so much to learn. But would I rather give my money to some Whiz who can make me a guaranteed 15% a year? Absolutely. Unfortunately, those people are all frauds that guarantee this return. Sad part is I’m sure there are still Madoff types out there.” Dave’s reasoning assumes that the amount of time most people spend on their investing is dictated by necessity: that the more you need to make money, the more time you spend working on it.
That’s certainly a factor. I’ve heard my father, Tim Lutts, warn investors against thinking of investing as a hobby, because most hobbies wind up costing you money. But even if you take investing as seriously as a heart attack, you still only have so much time to spend on it. So I did want to give Lois, and other readers in the same boat, some ideas that might help them spend less time on their investing. Middle ad
One idea is to hold fewer stocks.
Our own Cabot Wealth Advisory Editor Paul Goodwin touched on this idea a few weeks ago in his “Fortune Cookie,” the investing-related quote he comments on every weekend. Here’s the quote:
Paul added: “There’s a real sense of power to be gained from actually managing your own investments, but nobody ever said it would be easy. The easy choice is to let someone else do it. ‘Watching that basket’ requires time and attention.
Fortunately, the potential rewards, both monetary and personal, are substantial.”
Paul also asked our Chief Analyst Mike Cintolo, for his two cents on this quote. Mike wrote:
“Well, Twain couldn’t have written it better if he’d been a growth stock investor himself. I wouldn’t go so far as to say ‘fools’ are the only ones who spread out their purchases, but the question is really whether you want to be average (which you can do by owning index funds and a couple dozen names), or whether you want to strive for awesome performance... which normally comes via owning a few top-notch, revolutionary leaders, and knowing them inside out.”
While some might say concentration increases risk, especially for an 80-year-old retiree, it does make it a lot easier to “watch your basket.”
I keep my own portfolio very concentrated, so that I can keep an eye on each individual stock. I like to check each chart every day. If anyone asked, I could rattle off the name of every stock I own right now. (Of course, it helps that my portfolio is small.)
In addition to making it easier and less time-consuming to keep track of your stocks, having a more concentrated portfolio can make it much easier to do better than average. One big winner won’t affect your results very much if it only makes up 3% of your portfolio. But a larger position in that same investment could mean a very big payday.
As Mike argues very well above, the more you spread out your money, the closer you inevitably get to being average. Take the assumption to its extreme: if you owned every stock in the market, you’d be exactly matching the performance of the market.
Warren Buffett has said pretty much the same thing about his own portfolio (which is Berkshire Hathaway). Way back in 1995, he said, “The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas.” He reiterated the sentiment at this May’s shareholder meeting, noting that size had become one of Berkshire Hathaway’s big disadvantages.
But even if you’re not managing a portfolio the size of Berkshire Hathaway, there’s a size at which your positions are just too small to make a difference.
This all boils down to a question for you: how many stocks do you own?
I’d like you to tell me, if you don’t mind, by replying to this email.
And, if you have time, also let me know how you settled on that number. Is it influenced most by your time and attention, your investing system, or the size of your portfolio? (If it seems relevant, you can tell me the size of your portfolio too, and I’ll keep your information anonymous.) And, make sure to let me know how you feel about the number of stocks you own: do you wish you had more stocks, or do you think you already have too many names to keep track of easily?
Let me know by replying to this email, and I’ll update you on the results in my next Cabot Wealth Advisory. I’m interested to see how real investors distribute their eggs among baskets, and if you feel your level of concentration or diversification is working for you.
Wishing you success in your investing and beyond,
Chloe Lutts Jensen
Editor of Investment Digest
and Dividend Digest
P.S. Now is a good time to invest in strong stocks and Cabot Market Letter can help you find the next market leaders. With our market timing indicators flashing green lights, we’re seeing big potential for our stocks in the months to come.