What is the ideal number of holdings? Diversification (200+) vs concentration (<20)

FIRE v London3 Comments

As I set out when explaining my Investment Policy Statement, I am a big believer in diversification.  But I also know that you should only invest in what you know, and you can’t know everything; as Warren Buffet put it, “Wide diversification is only required when investors do not understand what they are doing.“.  How to strike a balance between having enough skin in the game when I have conviction, and having enough diversification to allow me to sleep at night?

An investment here, an investment there, and pretty soon you’re talking a lot of holdings

My own investment portfolio, which is a mixture of ETFs and direct holdings, and which covers a range of countries, contains more than 200 underlying holdings (see graph below). (Note: I say underlying holdings because I hold some securities in multiple accounts.  I consolidate my overall picture every month into one spreadsheet which aggregates by underlying holding).

Cumulative % of portfolio vs. number of holdings
Cumulative % of portfolio vs. number of holdings

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Osborne’s dividend tax wedge catches FIRE

FIRE v London6 Comments

Today’s budget, Osborne’s first ‘pure’ budget, is a fascinating bundle of policy, politics and posturing.  For us FIRE eaters, there is plenty to think about.  But for me there is one unambiguous negative: the tax hike on dividends for those of us with sizeable investments.

Dividend taxes are notoriously difficult to understand.  I find the easiest way to understand it has been to consider the Government as wanting to tax (and I mean tax – they ignore National Insurance here) people the same whether they earn money as salary or whether they incorporate as a company and then pay themselves retained profits as dividends.   The system we’ve had for years has seen the Government do this as follows – taking £1000 of salary/profit as the starting point:

  • Tax the company ~20% corporation tax.  Leaving £800 retained profit, payable by the company as a dividend to its shareholders.
  • Give shareholders a tax credit with their £800 dividend, amounting to one ninth of their dividend.  This basically was a slight fudge, and said the government was treating £800 divi as being £889 paid gross, with £89 of it having already been collected as tax (even though actually £200 has been collected as tax, tut tut).
  • Then tax dividends receivers at special rates (which was a quid pro quo for the slight fudge mentioned above).  Basic rate taxpayers paid 10% i.e. £89 which, hey presto, it turns out they have already paid, leaving no extra tax due.  Higher rate tax payers paid 32.5% on the £889, i.e. £200 extra, leaving them with £600.  This is, surprise surprise, what they’d have been left with net of tax if they’d received an extra £1000 of taxable salary.

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My investment returns in June ’15

FIRE v London1 Comment

My directly invested portfolio delivered one of its worst ever monthly returns in June.  With preliminary numbers now in, I’m down about 3.4%.  I’ve updated my returns page here.

What happened?  In a word, Greece; markets were down everywhere,  FTSE-100 was down over 6%, a particularly bad performance; European equities ex UK were down 4.4% (as so often, the UK is like an inferior version of the Euro, no matter what the ‘kippers will tell you); Australian equities were down about 4.6% (in GBP). Fixed income (at least the corporate bond types that I like) were down too: -3.2% in the UK, 2% in the USA, and 1-1.2% in Oz/ROW.   When equities and fixed income are down everywhere, I will suffer.

Thanks to the suggestion of @RIT, I have started tracking the market returns in each geography/asset type that I track against.  The back of my envelope suggests the markets I’m exposed to fell, weighted by my exposure, 4.4% last month.  Against that backdrop, I’ll take a drop of 3.4%.

The real fun starts this week, now that Greece has overwhelmingly voted to have nothing to do with the reforms the Eurozone insists are required to stay in the Euro.