Diversify to reduce risk

James is research director at Intelligent Investor and author of Value: Intelligent Investor’s Guide to Finding Hidden Gems on the Sharemarket

It’s great that you’re making such good use of the wealth you’ve built up but remember that it’s got to last. Life expectancies are increasing and you could be in for a lot of sailing! I’ll leave the overall wealth advice – including the vehicles through which to invest – to others and stick to the share portfolio.

It’s generally best to have at least a dozen stocks (probably more) to provide diversification, so on its own this portfolio will probably be a bit too concentrated. It’s not just about the number of stocks but their percentage weighting. Held equally, they’d each be 10%, which is high, but if any are well above this then it could bring in a lot of risk.

There might also be significant sector concentrations. For example, we recommend keeping your overall bank exposure below 20%, or closer to 10% for conservative investors. With both CBA and NAB, you could be well above this. Having both Wesfarmers and Woolworths might also leave you overexposed to retail.

However, you have to consider all this in terms of your overall wealth. If the portfolio is only a 30th of your total net worth then even a 30% weighting in this stock portfolio would only translate to 1% of everything taken together. Bear in mind, though, that your other equity investments could have similar concentrations, particularly in the banks. You should think about it altogether to get an idea of your overall exposures.

It’s also worth noting that all these are Australian stocks. Given that you’re considering retiring abroad, it will probably make sense to have plenty of international exposure, so check to see that you’re getting this from your other investments.

You could use the extra $100,000 to fill in the gaps and broaden your diversification. It’s true that stocks can be volatile but over the long term they tend to provide higher returns than bonds and cash. Having retired early, you need to keep a long-term focus. Property may also be a good option for getting specific exposure to a particular country if you’re serious about finally settling there.

In terms of the actual stocks, we have “hold” recommendations on them all, except Centuria, which we don’t cover. Sonic Healthcare, Wesfarmers and Woolworths are close to our buy prices, while Telstra is getting towards a point where we might sell.

Bear in mind that price and value will move about, and our recommendations will change over time. That needn’t worry you unduly. Good investing is generally lazy investing – too much activity often does more harm than good.

The less balanced your portfolio is to begin with, though, the more quickly it could get more unbalanced. If you’re going to go months without looking at it, then you’ll probably want to consider either a fully passive strategy or finding someone to manage your portfolio actively.