Morgan Housel, Andy Cross, & Megan Brinsfield

31 Pages·2016·2.01 MB·English

How to Construct
a Foolish Portfolio
Morgan Housel, Andy Cross,
& Megan Brinsfield
Megan Brinsfieldis the Director of Financial Planning for Motley Fool Wealth Management, LLC (“MFWM”), an affiliate of The Motley Fool, LLC, and an
investment adviser registered with the U.S. Securities and Exchange Commission. The views expressed herein are those of Ms. Brinsfieldand do not
necessarily reflect the views of MFWM or any of its affiliates. These comments may not be relied upon as recommendations, financial or investment
advice or an indication of trading intent.
A Foolish Portfolio
How many stocks should you own?
1. Enough to prevent a few losers from
ravaging your wealth.
2. Few enough so your returns don't just
mimic an index fund.
Dow Jones Industrial Average (30 stocks) S&P 500 (500 stocks)
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
• Studied the returns of 4,700 mutual funds.
• Over a 10-year period, about 80% underperformed an index
fund.
• But the average fund owned 140 stocks.
• The average fund’s 10 largest holdings – representative of
its best ideas – do, on average, beat the market.
• Most funds are spread far too thin to have a shot at beating
the market.
“Owning between 12 and 18 stocks
captures about 90% of the
diversification of owning
the entire stock market.”
Investment Analysis and Portfolio Management,
Keith Brown and Frank Reilly
Percentage of stocks that lost money, 1980-2014
Percentage of stocks that trailed the index average, 1980-2014
14%
Utilities
85%
54%
Telecom
68%
53%
Technology
71%
30%
Financials
58%
42%
Health care
60%
37%
Industrials
64%
34%
Materials
66%
48%
Energy
72%
Consumer
26%
51%
staples
Consumer
44%
65%
discretionary
Recommend investors own 10-30
stocks
Personally owned 100 stocks
One stock, Geico, increased
200-fold
Made up most of his portfolio
Accounts for all his long-term
outperformance
Owned 400-500 stocks over his
lifetime
Made most of his money on 10
of them
“If you remove just a few of
Berkshire's top investments,
its long-term track record is
pretty average.”
A Foolish Portfolio
This is a complicated topic that incorporates personal
emotions and risk tolerance.
It is not as scientific as people want it to be.
Be careful owning fewer than 15 or more than 50
stocks.
Should spread across at least five major industries.
In a new portfolio, 30 stocks in equal weights can be
a great rule of thumb.
A Foolish Portfolio
What say you,
Andy?