Is diversification dead? It largely failed us in the 2008-2009 financial crisis, but if you held on for the long haul it did breathe life back into your portfolio on the way back up.
A perennial question is how much diversification is enough? If you’re invested in mutual funds and ETFs, these are by definition already diversified, at least within the sector or group or style that they represent. You could own a fully diversified portfolio with only 5, or arguably even 3, ETFs.
Stocks pose a tougher challenge since they represent individual companies, and as such, might be like flying in a 10-row airplane or even a helicopter as opposed to the large, stable feel of a 747. You feel all the turbulence of the stock market, whereas in an ETF you’ll notice the turbulence too, but you will have this added feeling of insulation from it.
Not so long ago I was watching an interview on BNN with one of Canada’s billionaires, Michael Lee-Chin. Lee-Chin is an entrepreneur in the full sense of the word, owning and building various types of businesses. He primarily built his wealth, it seems, from an investment company he ran – AIC – which he later sold off after the 2008 financial crisis scared most of his investors out of the market.
One comment that struck me from hearing Lee-Chin is that in his view, you only need 15 stocks to be fully diversified. To me, 15 sounds a bit on the low side, although I have heard other analysts who would say about 20-25 stocks would do it. 25 stocks sounds much more reasonable when you consider how many great names there are just in Canada alone. Add in a handful of the U.S. blue chips and some top-tier UK, European and Asian stocks, and you’ll reach 25 in no time.
But Lee-Chin is more of a coveter than a hoarder. He seems to really, really, love the stocks he picks and he holds them forever. He is not a trader. It sounds as though he isn’t planning to sell any of his stocks. In this respect he might have something in common with Buffett in the sense that Lee-Chin seems most interested in buying businesses.
One stock Lee-Chin really likes (if he didn’t outright “recommend” it)? Manulife (TSE: MFC)! After all the recent troubles with its capital fortressing and dividend cuts, Lee-Chin is hanging on “without a doubt” because it is such a great company.
It’s a bit inspiring to have such a now seemingly “old-school” attitude towards one’s stocks in a climate where the mantra on the street seems to be “buy and hold is dead.” But Lee-Chin is a successful billionaire and philanthropist. I’ll think twice before dismissing his comments.
So the question now is, what 15 stocks to own? I already own well more than that, and I don’t plan on selling any just to meet a minimalist stock challenge of sorts, but I certainly can think about giving my attention to a select few. I think it might be wise.
What would you pick? Your top 15 stocks? Your top 15 favorite businesses? How much of that would you allot to international companies?
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