It's monsoon season in Korea right now. Due to the rain I didn't feel like doing much this weekend. I did make it to the gym at least. Anyways I was thinking about how many stocks should be in a portfolio. Some people feel a concentrated portfolio of the 5-10 best companies is where it's at while others own up to 50. There is not a right answer, but in my mind there are two factors that need to taken into account.
First of all the size of the portfolio is definitely is a factor. If you have 2 million dollar portfolio do you really think owning only 10 stocks is the best course of action? In my experience when you start approaching the 6 figure mark you'll be more comfortable with more stocks. You're spreading the risk around. No matter how much I might like the companies I own I know some of them are going to be losers. Be it dividend freezes, catastrophes (oil spills, hurricanes), loss of competitive advantages, or any number of other landmines it's going to happen. I believe a concentrated portfolio makes since for smaller and midsized portfolios (up to $500,00?) depending on risk tolerance.
Second of all when you have a concentrated portfolio you are essentially saying "I'm a great stock picker." There is no room for error. You have to be right all the time, or close to it. With owning 30-50 positions you're saying "I trust the dividend growth strategy more than the individual companies themselves, I'm not a great stock picker." I fall into the latter category. There is only one stock I truly believe will be a big winner over the next 10 years, that's Phillip Morris (PM). As great as KO, JNJ, CVX, MCD, etc. are I just do not think they are on the same level.
I trust the dividend growth strategy itself more than my ability to identify and purchase great companies at attractive valuations. I might have a list of the 10 greatest stocks right now but it will be constantly changing. I know I'll come up with new best ideas in the future.
I plan to own 30-35 stocks but it won't be equally weighted. I want PM to be the largest position. In the end we have to take what the market gives us. Even the mighty Phillip Morris is trading at $90/share right now, it's not cheap.