I was asked a question over the weekend, about how many stocks to keep in a portfolio and I’d just like to share my response here. “ I would just like to ask advice if it is ok or practical to maintain a large stock portfolio, say 10 companies (5 comps for my retirement and another 5 for my house and lot) with a maximum amount of 5000 invested monthly (2500 for retirement stocks and 2500 on the house and lot)
Another question, on the retirement, I plan to let it just stay there for 5 years or more but for the house and lot, I need to accumulate 1Million by the 5th year. My concern is, am I investing the right amount for the house and lot with tenure of 5 years considering stocks grew approx. 7-10% (hula ko lang) yearly? am I using the correct vehicle or I needed to add another like mutual funds, uitfs etc. to be able to achieve 1Million in 5 years time?
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Now I just realized that the retirement plan mentioned is not in 5 years (I answered this without coffee early in the morning! LOL) but I think I provided a valid point in that area.
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My answer :
Invest in your education – because with due respect to the people providing inputs here, you will get conflicting ones (like my beliefs on diversification) and ultimately you have to make the decision.
My guess is you are an OFW (Overseas Filipino Worker), hence the “retirement” goal, to go home to be with family. I was thinking about the “5 years to Retire” – why is this so, what are you going to do when you “Retirement”. Most people I know who have retired (including my parents and relatives) wanted to be active and ventured into a “business” doing something productive and not having to answer to a “boss”, now this is the thing (and perhaps your plan) – you need skills for that, especially if you expect the money to come in. So go get educated / skilled that you can use when you “retire”.
Just saving 5000 amount, you’d get 300,000 for 5 years. You want a return of more than 300% from your accumulated capital. My question is do you have the skills to do this, just to give you a reference professional fund managers aim 20% return per year or 100% for 5 years. You want a goal that stretches you but that you can achieve.
So again get educated, get the skills to help you invest and skill that will earn you an income on your planned “Retirement”.
Now if you ask me — focus on the House and Lot > for the simple reason that the 1Million is already a big goal, and you can maximize achieving your goal if you focus on it. Besides, with house and lot taken cared of, you will not have to rent (keep costs down) or have enough to keep loan interest payments to the minimum. No use being ‘retired’ when you have housing costs that are high. With a house, you can even use it as collateral if you need to. Now, I am not saying you don’t allocate for retirement, but maybe give a higher percentage to the House and Lot goal, and when that is met, you can definitely put a bigger chunk on the retirement goal.
STOCKS
– 10 companies are too many to keep in a portfolio with the fund size you have in mind. I don’t recommend you buy “monthly”, you have to get smarter than that, to control your transaction costs. How do you know when to buy – go back to point 1. Education.
Which stocks to buy :
Again, focus – don’t diversify. Warren Buffett famously says “diversification is protection from ignorance” and I tell everybody to go for strong sectors, so it is important to be educated which ones are strong at a particular point in time. With the current economy, the strong sectors are banking, consumer stocks. Take BDO for example, lowest price for the year was 58.9pesos and highest is 99pesos. An increase of 68%, let’s just say you make half of that or 30%. It is a far better return than your 7-10% estimate. I suggest you compare that with other products you may be offered or come across.
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Additional point/s.
1. Someone might say, that the stated target is an impossible, too ambitious goal : To have 1 Million in 5 years saving only 2500 per month. I say don’t limit the blessings coming to you. I have, from experience, received what I targeted and even more with having a big, seemingly impossible goal to work on. Just keep working on it, work on it, work on it. It will be seemingly difficult but when you got all the things you need to learn, you’re going to get there.
2. How many stocks to keep in portfolio. There is no magic number. I left it unsaid in the last paragraph above that if you have only 1 stock that makes 68% in a year, why will you have other stocks that is just going to eat up your attention and attract transaction costs. So focus on the stock/s that are performing well. With the account size given I’d say 2 companies will work.
This photograph I took in a garden show reminded me…to focus on the best….
Go for the Best
