How Not To Structure Your Portfolio

While I try not to alienate anyone that reads my content I run the risk of doing that to a recent emailer.

He told me that he is 48 years old, has 18% of his portfolio in Berkshire Hathaway and he wanted to know what I thought about that weighting and that stock.

For purposes of this article all I'll say about the stock is that I have never had any interest in buying it.

Hopefully one source of income for you in retirement will come from a portfolio invested in some combination of stocks and bonds.

Managing this portfolio can be as simple or as complex as you want to make it. A do-it-yourselfer that, presumably, does not want to work full time on their portfolio is better off favoring simple.

Simple probably means some combo of ETFs and OEFs for the vast majority of your equity portfolio. I am saying most not all of your portfolio. A few individual stocks here and there is not really an unreasonable burden.

Simple also pertains to risk taken. Staying reasonably close to the market should get diligent savers to where they need to be. Taking outsized risk that is unnecessary makes no sense. This takes the conversation back to 18% in Berkshire. The strategy may or may not work, the emailer may never have to face the consequence of the risk he is taking but that does not mean the risk doesn't exist. The very fact that he emailed me at all reveals that he already knows the answer.

We have learned that any stock can go to zero. Very few do but there is no way to know that a company is lying. Lies equal a deathblow.

If you have 18% in a company that happens to go to zero it will take several years to get back to where you were. If you have 3% in a stock that goes to zero you might make a quarter of that back just in dividends in a couple of weeks.

The emailer's position creates another problem. Only 82% of the portfolio is left to invest. He will very likely miss out on something else that might do well at some point. For example, China and gold, as investment themes, have provided tremendous returns in the last few months. I have had exposure to both for several years. Before the last run up for both they had been kind of dead money for a while. Then out of the blue they both went up a lot which helped the overall portfolio.

The idea was that at some point they would have a good run. Just being patient was the skill deployed, not stock selection. If I did not have room for these two themes, the portfolio would have been impacted. Next quarter, leadership will probably come from somewhere else. If you are properly diversified, you will not have to figure out what will lead.

But you need to have room.