Dear Nancy,
I've been doing a lot of my own investing using an online brokerage account. I hold about 25 stocks and nearly 20 ETFs, and believe I have a well-diversified portfolio as a result. Do you think I should hold even more, or have I gone overboard in my purchases? I try to buy securities from both Canada and the U.S., as well as internationally, and hold a couple of laddered bond funds as well. For fun, I also own lots of niche ETFs that focus on specific sectors.
Any advice for my portfolio, which frankly, kind of disappointed me in terms of returns last year?
Thanks,
Scott
Dear Scott,
Long have we heard that diversification reduces risk and can lower volatility. It is true from a numbers standpoint. However, based on a study done by RBC Capital Markets Quantitative Research, they concluded that there is no need to hold hundreds of stocks. A stock portfolio of 15-20 stocks is all that is required for a Canadian investor to be fully-diversified. Owning more stocks only contributes incrementally to the return on a portfolio.
It is true that buying ETFs is an inexpensive way to get diversification, but owing 20 may be excessive. If you are trying to get coverage in many sectors, you may be better off with a broad index ETF instead. Varying your selection geographically is more important, especially now when certain areas of the world are forecast to do better than others.
If you compared the returns of your portfolio specifically to that of the Dow Jones industrial average (which had a stellar return for 2013 of 26.5 per cent) and owned such a broad selection that you mentioned, it is not surprising that your returns did not measure up. You have to make sure that you are making an apples-to-apples comparison.
I would reduce the number of ETFs you own, ladder GICs or other fixed-maturity instruments and make sure your 25 stocks are held in the appropriate types of accounts for tax efficiency. For example, it is best to own U.S. dollar-based company's stocks in a retirement account to avoid the non-residency withholding tax. Canadian dividend paying stocks should be held in a non-registered account to benefit from the dividend tax credit.
There is a fine line between simplicity and over-diversification. It may be worthwhile to get a second opinion. There are many styles of investments strategies, so it is important to find the one that works best to help you sleep at night.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.