Minimizing Risk -- setting limits

I'm updating my portfolio. I'm reconsidering what I own and how much. And how much is too much when it comes to stock ownership? This a core question that must be asked by all investors. Ignore it at your peril.

In an income-weighted retirement portfolio the rule of thumb is to put no more than 5% to 10% of the total portfolio value in any one stock. Following this rule lessens risk and encourages diversification.

Risk Management: As an investment in any one stock grows, one's exposure to company-specific risks grows. Think of Nortel. If you don't understand, Google Nortel or click the link.

Diversification: A well-diversified portfolio holds a variety of stocks spread over a good mix of sectors and asset classes. For instance, if it has been determined that the investment goal is to have 12% of the portfolio value invested in the telecom sector, this investment would encompass a number of telecoms and not just one. 

An equal weighting of 3% each of BCE, Cogeco, Quebecor and Telus would result in a 12% total investment in telecoms. Of course, equal weighting is not demanded. Personally, I would underweight BCE and overweight Telus and favour Quebecor slightly over Cogeco with the remaining funds.

Income Generation: Always be aware of the income potential of any investment. But a warning, do not let the need for income overly influence your investment decisions. A very large dividend can be a warning and not a carrot. Don't take the bait. 

BCE is yielding 8.5% today. That is a warning. I suggest underweighting BCE in your portfolio and overweighting your investment in better positioned telecoms is the right approach. I have done much better with Cogeco and Quebecor than I have with BCE. The jury is still out when it comes to Telus.

Portfolio Adjustments: As a retiree grows older, the usual recommendation is to reduce the exposure to equities and increase the fixed-income investments. This can be tougher than it sounds. Move funds from equities into bond ETFs and money can still be lost. Put the funds in GICs and if inflation outpaces the interest paid, one suffers a loss in buying power. Losing, like winning, is simply part of life. Just try to win more than you lose.

I swim against the tide here. I like to have massive dividend income generated by trusted companies. When expenses are as expected, there is money left to reinvest in the market. When unexpected costs arise, the flow of cash is used to meet or at least reduce the unexpected cost. So far, this approach has worked well for me. I usually have no more than 2% of my funds in cash but I am flexible.

Conclusion: I cannot state this too strongly. Never allocate more than 10% to any one stock. This is the one rule that I have that is carved in stone. Some analysts will advise putting more into a stock and they will call this an aggressive income strategy. Don't do it! Think Nortel.

By the way, the art shows a small piece of my actual retirement portfolio spreadsheet.