Many of us are guilty of jumping on the bandwagon when it comes to investing. Maybe you are focused on artificial intelligence this year, or you were sucked into the crypto hype in 2021, and these trends may have left your portfolio looking like a bag of pick n´mix.
What does your investment portfolio look like?
By Portugal team
This article is published on: 16th December 2023
Downsides
Whilst diversification is key in any portfolio, too much diversification can also be a problem and often results in an incohesive portfolio without a clear investment strategy. It also requires a lot of effort, time and research, and can even lead to inefficiency and underperformance as you spread yourself too thinly.
Being overweight in certain areas can create risk, and being underweight can be a drag on your portfolio as positions are too small to make a meaningful impact on returns.
It is also easy to duplicate holdings or even end up with a similar allocation of holdings to that of a tracker fund, just at double or triple the cost.
More pitfalls
As humans, we are also prone to biases. The most common ones encountered when investing are:
- Home bias: this is where we focus on investing within our home markets. Many UK advisers are guilty of this, with a weighting towards the UK market rather than a global approach.
- Recency bias: this is the tendency to react and dwell on recent events and forget the long-term patterns and trends.
- Confirmation bias: we often search for evidence that supports our views and see less value in opposing data. A lack of impartiality is likely to have a negative impact.
- Confidence bias: We are inclined to overestimate our skills as investors. Even with all the money, backing and decades of research at their fingertips, professional fund managers often make mistakes. Can we really perform any better with consistency?
Lastly tax efficiency is often overlooked and can have a huge impact on returns when you consider the benefits of compounding over the years. It might cost you capital gains tax to restructure now, but it will save you from an even bigger tax bill in the future.
What is the magic number?
How many holdings you should have will depend on your preference for stocks versus funds, investment style and the time you have to dedicate to research and monitoring.
As a rule of thumb for non-professionals, a portfolio of stocks should sit at around 20 to 25 holdings, above this you are verging into professional manager territory and may not have the resources or time to back it up. For funds, diversification can be built in and so it is possible to hold just one tracker fund, or a small number of multi-assets funds (spreading investment manager risk).
What next?
If your portfolio is looking a bit haphazard, start as you mean to go on and regularly set time aside to do full reviews. It is much better to do this in one go, rather than bit-by-bit, as it will allow you to look at the portfolio as a whole and remain consistent.
You will want to look at what you are holding. Are you guilty of ´sunk cost fallacy ´and holding on to stagnant holdings or losses in the hope they will recover, meanwhile missing out on returns elsewhere? Or maybe you need to look at new investment opportunities, revisit costs versus performance, or rebalance.
If you are craving simplicity, utilising passive funds that focus of large markets can offer a good low-cost option with returns that even active fund managers often find hard to beat.