I manage a 401(K) that allows for choosing individual stocks. Using BetterInvesting methodology it has compounded at a little over 13.5% since I started managing it. It will keep us comfortable in retirement. I noticed I have a bit more hesitation when opening a new position in this account over the last year or two. I took to heart the recommendation of our own Doug Gerlach that a position should be a minimum of 3% of the total value of the portfolio. As a portfolio grows this minimum, in dollars, also grows. That is the cause of my hesitation - do I really want to invest so much to start a position? This question keeps popping into my mind as I manage this portfolio.
As part of my duties at ICLUBcentral I often need to look at club data. So, I see the total value of the club. The largest club value has been just over $4 million. If this club followed the 3% guideline, a new position would be a minimum of $120,000. That is a large amount for starting a position. I am not close to that amount (yet), but a 3% minimum now is at least 2X the maximum annual contribution made to this 401(K). That also seems like a large initial position.
This hesitation to risk larger amounts in an initial position was completely unexpected for me. So far, I have pushed through and kept minimum positions to about 3%. This has kept the portfolio to a manageable number of companies while allowing individual positions to make a reasonable contribution to the growth of the whole portfolio.
You do not want the number of companies in your portfolio to balloon out like some I have seen. These portfolios had 60+ stocks. The largest number of stocks in a portfolio that I have seen is 200+. The positions ranged from 2% to less than 0.1%. More than half the stocks in the portfolio comprised less than 0.5% of the whole. You would save a lot of time and probably have better performance results with an index fund than go to the extreme diversification of this club.
If you are having this hesitation due to the success of your investing, I can give my recommendation to push through and keep the 3% minimum position guideline. For me, the benefits have been worth the psychological stress of larger minimum positions. Remember to be diligent in your analysis of the companies in the first place. Keep following the rules that made your investing successful.
Russell Malley