Diversifying our stock portfolio(s)

Moe_The_Bartender

The article linked in the OP is somewhat misleading. The businesses quoted may pay out the biggest amounts but if you look at MSFT, APPL and TSM as random examples, they are yielding around 1% or less. They are growth stocks and the yield is irrelevant. Fine if you bought them a few years ago at a fraction of the current price as the effective yield would be several times what it is today. You wouldn’t buy them for income now.

[Deleted User]

Diversifying a stock portfolio is not a given good. It won't make you richer. In fact, since there is transactional cost, it will make you slightly poorer.

eskbanker

ZingPowZing said:

Diversifying a stock portfolio is not a given good. It won't make you richer. In fact, since there is transactional cost, it will make you slightly poorer.

At the risk of responding to one generalisation with another, diversifying should take the investor closer to average performance - this is likely to be good news if starting from a below-average portfolio but conversely bad news if starting from an above-average one....

[Deleted User]

Agreed.
So, any number of individual investors could pool their holdings but it would make no difference to the aggregate value.

JohnWinder

Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2900447 or http://dx.doi.org/10.2139/ssrn.2900447

'Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages. '

[Deleted User]

JohnWinder said:

'Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. 

Interesting statistic.
So investment in one individual common stock would probably have underperformed the benchmark (Treasuries). Given this likelihood, and the certainty that buying all XXXX common stocks would have exceeded the benchmark, the question is What is the number of holdings that would make exceeding the benchmark more likely than not?
The answer, surprisingly, is three.

Although personally I wouldn't be comfortable holding less than three stocks, the two held by Langtang seem well suited to his requirements until retirement. If others identify growth stocks that also pay 5% dividends, please let us know.

Thrugelmir

Langtang said:

Would that be suitable diversification? Is there a better/different way of getting the same results?

A t the very least all companies are likely to face the challenge of higher rates of corporation tax. Which is going to impact their ability to pay dividends in the short term. Biden has mooted an increase a rise of 8% in the US rate. This week we will find out what's in store for UK companies. 

Steve182

Langtang said:

Steve182 said:

If it's dividends are you're mainly interested in I'm curious why you would keep hold of Chevron rather than looking elsewhere.

You're obviously aware of the double taxation issue on dividends unless they are held in a SIPP?

The shares don't look particularly attractive to me looking at current or forward metrics.

I'm not generally a value or income investor but I do hold DGOC which is a profitable and growing London listed US gas/oil producer.  It has significantly higher dividends and more attractive P/E's than Chevron.

DGOC still has double taxation issue of course, but my SIPP resolves that problem

Thanks very much for taking the time to post. As I am a relative newbie to investments/Stocks, your numbers are Greek to me. Not sure I fully understand why they don't look good to you? Then again, I don't really understand period. Although I do understand that the double tax thing is a bit of a faff.

As I mentioned in another reply:

To put it into context, my FIL got the shares whilst working with Texaco - half paid, half free, and they've performed really well for him over the years so I thought, if it ain't broke, don't fix it. I can see the diversification aspect, but just feel that they're doing OK and are doing what we need them to... All I need to do is to wrap them in some kind of tax efficient way.

Investing in individual shares without proper knowledge or understanding of those companies or their markets is fraught with danger. You presumably remember AOL, Netscape, British Gas, Royal Mail etc etc.  In a couple of years will Chevron be doing any better than they are right now? Maybe it will, maybe it will not?

The example I gave in my reply was another US oil/gas producer who is paying almost double the dividends of Chrevron, who's shares are cheaper and who's prospects, based on recent and forward numbers look favourable to me at least. Not everyone understands company accounts and I'm definitely no Buffet. However if you are investing vast sums in shares you should have a basic grasp at least. If you don't, it really is a case of pinning the tail on the donkey.

You mentioned 2500 shares I recall so at $100 that's $250,000 in Chevron if I'm, not mistaken? That's probably the most I would consider investing in a single company if I had a £1,500,000 portfolio.

I would be looking to split my portfolio between a minimum of 12 different companies spread across several different sectors.  As things stand mine is split between 24

maxsteam

Langtang said:

Would it be better to sell some of the Chevron shares and to buy some of those listed above

You will be able to look back and answer the question in 12 months time. IMHO there is nothing wrong with seeking, reading and digesting other people's opinions but the crucial factor is what are your views about the companies concerned? Do you feel that the shares are overvalued or undervalued at the moment (look at charts, PE ratios, debt ratios, etc.)? What are your opinions of the management? How do you see the sector developing over the next years?

If you really can't make up your own mind about whether to hold or sell, you can always sell half of the holding.

Prism

JohnWinder said:

Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2900447 or http://dx.doi.org/10.2139/ssrn.2900447

'Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages. '

What is interesting is the Baillie Gifford use that paper as one of their main tenants of their style of active investing. Try and find the 4% or in fact the less than 1% that generate most of the returns.