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It's easy to find guidelines for how much of my non-retirement portfolio should be in stocks as an asset class (i.e. via mutual funds) but I'm having trouble finding recommendations for how much should be in individual stocks.

I have about $320k in non-retirement accounts.

I have no definite plans to use the money any time soon. I would say that the chances of me needing to use more than half of it in 5 years is maybe 50%, and within 2 years maybe 10%. I guess risk-wise, the point is, if I lost 10% of it overnight, then it would not affect me. (Case in point: this month so far)

I enjoy investing in the stock market, and feel like I do reasonably well. I purchase individual stocks, and some options. I'm obviously aware of the risks of individual stocks and especially options.

How can I determine what is a reasonable percentage to allocate, overall, to individual stocks in my portfolio as a group? What should I additionally consider when determining how to limit the percentage in any one single stock?

  • 1
    Investment advice is off topic. – user4127 Aug 22 '11 at 16:59
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    @Chad Buy/sell advice for specific investments (e.g. "buy AAPL") would be off-topic. Not "investment advice" in general. I would expect some guidance could be provided here to allow the OP to determine a portfolio weighting he would be comfortable with -- that is, without recommending a specific set percentage or what, precisely, he ought to invest in. – Chris W. Rea Aug 22 '11 at 17:37
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    @ChrisWRea I would go so far as to say that specific percentages invested in asset classes (not specific investments) are also ok. For example: "Invest 10% in Large Cap stocks." And I also agree that specific stocks or fund recommendations are "too localized" and not of lasting value to the Q&A format of the site. – Alex B Aug 22 '11 at 17:40
  • What are your definite plans to use the money further out than 5 years from now? – jldugger Aug 22 '11 at 19:06
  • Sorry, I should have clarified - no definite plans at all, I just think there's some reasonable chance that I'll need some of it then. I've edited the question. – Jer Aug 22 '11 at 20:02
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If you are comfortable with the risk etc, then the main thing to worry about is diversity. For some folks, picking stocks is beyond them, or they have no interest in it. But if it's working for you, and you want to keep doing it, more power to you.

If you are comfortable with the risk, you could just as well have ALL your equity position in individual stocks. I would offer only two pieces of advice in that respect.

1) no more than 4% of your total in any one stock. That's a good way to force diversity (provided the stocks are not clustered in a very few sectors like say 'financials'), and make yourself take some of the 'winnings off the table' if a stock has done well for you.

2) Pay Strong attention to Taxes! You can't predict most things, but you CAN predict what you'll have to pay in taxes, it's one of the few known quantities. Be smart and trade so you pay as little in taxes as possible

2A)If you live someplace where taxes on Long term gains are lower than short term (like the USA) then try really really hard to hold 'winners' till they are long term. Even if the price falls a little, you might be up in the net compared to paying out an extra 10% or more in taxes on your gains. Obviously there's a balancing act there between when you feel something is 'done' and the time till it's long term.. but if you've held something for 11 months, or 11 months and 2 weeks, odds are you'd be better off to hold till the one year point and then sell it. 2B) Capture Losses when you have them by selling and buying a similar stock for a month or something. (beware the wash sale rule) to use to offset gains.

  • Great advice, particularly the "re-balancing" aspect of your 4% rule. I always do have a tough time knowing when to sell a winner (there is definitely an emotional attachment to it). In theory you should be able to say to yourself "if I didn't own this right now, would I buy it?" but we know that can be easier said than done. And totally agree about holding stuff over a year - in general I do this about 90% of the time, with the other 10% being pre-planned short term trades. Thanks. – Jer Aug 23 '11 at 17:50
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    A good rule for rebalancing is to go on a basis of how far out of balance you let things get. If you trigger a rebalance when at least one asset is at least 10% more than what it should be, it allows things to fluctuate slightly without having to do a lot of selling/buying all the time. If you are continually adding money, then you can rebalance when it is needed by not buying more of something that is above allocation, and more of things that are below. Keep good track of all your lots, and if you have to sell, do it on a 'least tax' basis. – Chuck van der Linden Aug 24 '11 at 18:58
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How much should a rational investor have in individual stocks? Probably none. An additional dollar invested in a ETF or low cost index fund comprised of many stocks will be far less risky than a specific stock. And you'd need a lot more capital to make buying, voting, and selling in individual stocks as if you were running your own personal index fund worthwhile. I think in index funds use weightings to make it easier to track the index without constantly trading.

So my advice here is to allocate based not on some financial principal but just loss aversion. Don't gamble with more than you can afford to lose. Figure out how much of that 320k you need. It doesn't sound like you can actually afford to lose it all. So I'd say 5 percent and make sure that's funded from other equity holdings or you'll end up overweight in stocks.

4

I find the question interesting, but it's beyond an intelligent answer. Say what you will about Jim Cramer, his advice to spend "an hour per month on each stock" you own appears good to me. But it also limits the number of stocks you can own. Given that most of us have day jobs in other fields, you need to decide how much time and education you can put in.

That said, there's a certain pleasure in picking stocks, buying a company that's out of favor, but your instinct tells you otherwise. For us, individual stocks are about 10% of total portfolio. The rest is indexed.

The amount that "should be" in individual stocks? None. One can invest in low cost funds, never own shares of individual stocks, and do quite well.

3

I think it depends entirely on your risk tolerance. Putting money in individual stocks obviously increases your risk and potentially increases your reward. Personally (as a fairly conservative investor) I'd only invest in individual stocks if I could afford to lose the entire investment (maybe I'd end up buying Enron or Nortel).
If you enjoy envesting and feel 10% is an acceptable loss I think you have your answer

0

I'm in a remarkably similar situation as yourself. I keep roughly 80% of my portfolio in low-cost ETFs (16% bond, 16% commodities, 48% stock), with about 20% in 6-8 individual stocks. Individual stocks are often overlooked by investors. The benefits of individual stock ownership are that you can avoid paying any holding or management fee (unlike ETFs and mutual funds). As long as you assess the fundamentals (P/B, P/E, PEG etc.) of the company you are buying, and don't over-trade, you can do quite well. I recommend semi-annual re-balancing among asset classes, and an individual stock check up. I've found over the years that my individual stocks outperform the S&P500 the vast majority of the time, although it often accompanied by an increase in volatility. Since you're limiting your stake to only 20%, the volatility is not really an issue.

protected by Chris W. Rea Sep 25 '17 at 19:02

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