Trimming an Overloaded Portfolio

By TradeSmith Research Team

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Obesity is an increasingly global epidemic. Our consumption-driven economy has led us to believe that we must try a little bit of everything… and many people are simply trying to consume too much.

While “a little bit of everything” may work for what we put on our plates for a holiday banquet, it’s a woefully inefficient strategy when it comes to our investments.

In fact, I believe portfolio concentration is one of the great opportunities we enjoy as individual investors. It’s one of the advantages we have over large investors and institutions.

Unfortunately, it’s one of the most overlooked opportunities by individual investors.

Therefore, let’s examine why you should consider trimming your portfolio for the coming year… and how to go about it.

Trimming a Portfolio

We’ve been advocating for portfolios of 15 to 25 stocks for the core holdings of individual investors. I have to admit that I arrived at those concentration levels by eyeballing optimal portfolio sizes built from the recommendations of several investment research firms.

All of the work we’ve done over the past year shows that smaller portfolios have the potential to soundly beat the S&P 500.

Some of the billionaires that we follow own hundreds of stocks. They do a great job of stock-picking. However, we brought their number of holdings down to only 20 positions that are in the Stock State Indicator (SSI) Green Zone. See the outperformance when compared to both the S&P 500, and the billionaires themselves. It is incredible.

Concentrated portfolios beat the billionaires (and the S&P 500) with their own stocks

We also looked at the results of the Stansberry Research Alliance stock picks. Stansberry Alliance members have access to hundreds of different recommendations. Because of the large number of stocks they follow, beating the S&P 500 is difficult.

However, when those hundreds of stocks are whittled down to only 20 stocks at a time that are in the SSI Green Zone, the outperformance is staggering.

Concentrated portfolio of Stansberry Alliance revealed staggering results

Earlier this year we dug deeper into this question of how many stocks a portfolio could have and still outperform the market averages. Using our database of billionaires, we found the best results are achieved by holding between 20 and 60 stocks.

Chart displays optimal number of stocks to hold

I favor the lower side of the 20 to 60 range myself but for those that don’t want to trim their portfolio that much, the data supports portfolio sizes as high as 60 stocks.

The Takeaway

Whatever you decide is the number of stocks you are personally comfortable holding in your portfolio, it’s important to realize that, much like going on a diet, getting to your optimal portfolio size is going to be a process.

It makes sense for this downsizing to happen over a 3-6 month timeframe depending on the number of stocks you own and the number that you ultimately want to manage.

Next week we’ll cover some specific strategies for trimming down counterproductive portfolio girth and help set you up for a wildly successful 2018.

Make more. Risk less,