Those with investment portfolios destined to be one’s lifeline in retirement may choose to simply leave everything as is and hold long-term. This is a strategy that is certainly a good one – too much buying and selling in one’s portfolio can incur a tremendous amount of fees over time that can erode one’s long-term returns.
That said, ensuring one’s portfolio is well-balanced is a prudent idea. Having too many eggs in one basket, even a really good basket, could turn out to be problematic if things happen to turn sour with that one particular company.
One good idea is to set a limit, in percentage terms, of how big one would like his or her biggest position to be in a given portfolio. A good rule of thumb for those with a well-diversified portfolio of investments is to have roughly 20 stocks across a number of different sectors, to reduce portfolio risk and create better risk-adjusted returns over time.
One might start by putting a balanced amount into each stock – 5%. Over time, some investments will vastly outperform others, and all of a sudden one stock might make up 15% or 20% of the portfolio. Trimming that back and adding to the other great stocks one thinks will bounce back, or adding a new position here or there, could enhance returns over time.
Setting a limit (maybe 10%, maybe higher for those with more aggressive growth portfolios) helps to keep the diversification one sought to achieve alive.
Invest wisely, my friends.
