Crossvault Concentrates. Why We Focus on 20 Great Stocks.

by Laura Ehrenberg-Chesler on March 12, 2009

in Asset Allocation,Investment Strategies

Most mutual funds and investment advisors own more than 50 stocks in their portfolios and, it is not uncommon to find over 100 companies.

At first glance, this would seem to give an investor a lot of diversification, and that would be good. But, the latest bear market has proved that this kind of diversification, or “over diversification”does not necessarily protect investors from large losses.

At Crossvault we would argue that having fewer stocks gives an investor adequate diversification, and in addition has at least two important benefits.

The first benefit – it allows the portfolio managers, the people actually making the final decisions about what goes into a portfolio, to know their companies well. Common sense would dictate that 20 companies, rather than 100, are easier to monitor.

Allowing winners to meaningfully impact the portfolio is the second benefit. With only 20 stocks in a portfolio, a winning stock can have a meaningful and positive impact on the overall performance of the portfolio. With 100 stocks, even if a position doubles it cannot impact overall performance in a significant way. With a strong sell discipline, fewer stocks do not necessarily carry more risk, but have the potential for outsized returns.

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