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

Money Magazine Australia - - ASK THE EXPERTS - JAMES CARLISLE

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.

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