How Many Investment Portfolios Should You Have?

As an SEO expert, I have observed that the ideal number of investment portfolios varies greatly depending on individual circumstances and financial goals. In my experience, an investor can find success with both a minimal and a more diversified approach. Here, I will explore the reasoning behind having multiple portfolios, the potential drawbacks, and the benefits of a focused and well-diversified strategy.

My Personal Experience:

I own six distinct portfolios, each serving a unique purpose. My IRA serves as my retirement fund, the smallest of my portfolios. The 'silly money' portfolio consists of investments I don’t take too seriously, also being the smallest. The cash-generating portfolio covers expenses like Christmas and birthdays. A specific portfolio is dedicated to supporting my wife in the event of an accident. Another portfolio aims to cover car payments. Lastly, I have a tax-free investment portfolio. Over two decades, I have honed this strategy, and now I believe it may serve as a model for others to follow. However, managing so many portfolios can be time-consuming, as it requires approximately ten hours per week.

Recommended Approach for Most Investors

Most financial advisors recommend maintaining between three to five stock portfolios. Having too many portfolios can potentially dilute your investment return over the long term. Instead, focus on a few high-quality, well-researched companies that can leverage the power of compounding. For detailed guidance on identifying these companies, refer to this article: ‘How to Choose High-Quality Companies for Long-Term Investment’.

The Largest Mistake in Investing: Over-Diversification

Over-diversification is a common pitfall. It often leads to a lack of focus and potential losses due to handling too many stocks. The key is to focus on quality and aim for the best companies. This reduces complexity and allows for better allocation of time and resources.

Varying Portfolio Strategies

A single investment portfolio or multiple portfolios can be a logical choice, depending on the investor's financial goals and circumstances. Having multiple portfolios can be useful when an investor has various financial targets, each requiring a different investment strategy. However, such an approach can have drawbacks, including the lack of efficient rebalancing between segments.

Understanding Net Worth:

Net worth is a critical concept. It is calculated as the total assets minus liabilities. The more significant the total assets, the higher the net worth. Therefore, viewing an investment portfolio holistically as a collection of all securities helps in understanding its overall health. However, creating separate investment strategies for different goals may not always be ideal.

Segmentation Drawbacks:

Lack of Rebalancing: When different segments of a portfolio are created (e.g., A and B), it can lead to inefficiencies in managing risk and return. Each segment may have distinct parameters, but to maintain the same level of risk in the combined portfolio, these segments can end up sacrificing profitability. Increased Market Risk: This approach can unintentionally increase the overall market risk within the total portfolio by diluting the potential benefits of a well-balanced investment.

Bucketing: One advantage of portfolio segmentation is the use of bucketing, a strategy that separates assets based on financial needs and time horizons. This can be beneficial for managing liquidity and risk distinctly at different stages of life.

Currencies and Portfolio Segmentation:

A situation where portfolio segmentation is justified is when dealing with assets denominated in different currencies, requiring a tailored approach to manage exchange rate risks.

Individualized Solutions:

It is challenging to provide a one-size-fits-all answer. Each investor’s circumstances are unique, and an individual solution is often the best course of action.

Useful Resources:

If you are still unsure or need more detailed guidance, consider reviewing the presentation titled 'How to Build an All Weather Investment Portfolio'. Additionally, a stock advisor service can be incredibly helpful, offering tailored stock selection or access to a robust stock research database. Websites like DaytradeReview can guide you in selecting the best stock consultant.