How many stocks should you own? I get this question often from readers.
If you’re an indexer the answer is probably as many as possible. In The Investor’s Manifesto author William Bernstein writes “since we cannot predict in advance which stock and bond asset classes will perform the best, we diversify.” Investors can therefore reduce stock ownership risk by owing the whole market not just a few select companies. Seems like a smart thing to do, so I follow Bernstein’s advice. I own thousands of companies via my low-cost, broad market indexed products and I have no intention of changing or selling those products. Each quarter, distributions from these products are paid and reinvested to buy more units. This compounding machine for a few of our Exchange Traded Funds (ETFs) was set in motion 4-5 years ago and forms the foundation of our Registered Retirement Savings Plans (RRSPs).
With our Tax Free Savings Accounts (TFSAs) and taxable accounts there is a different story – we focus on Canadian stocks, particularly those that pay dividends and have been doing so for decades. The Canadian market is a rather small market on the world stage (it represents about 4%) so I feel rather comfortable owning the largest Canadian banks, insurance companies, telcos, utilities and resource companies as part of my dividend stock portfolio.
In his now famous tome The Intelligent Investor, Benjamin Graham argued that a portfolio of 10 to 30 stocks provided adequate diversification. If only speaking to the Canadian market, I might agree. It should be noted that Graham’s stocks were not selected at random but instead based on a number of careful business metrics and more importantly these stocks were bought at prices that provided a “margin of safety”.
Beyond Graham modern financial academics suggest that no less than 50, or even 100 stocks will provide ample diversification and if speaking about domestic and international equities I could see that argument. Then again, the best stock diversification is to own the whole market.
As a buy-and-hold dividend growth investor I’ve been very comfortable to date with my 30 Canadian holdings. These are not companies I trade in and out of. I have purchased these companies to reinvest the dividends paid each month and quarter for cash flow, and I hold them for rising dividends over time. I don’t pour over financial statements or read the latest business news on them. I simply let the companies work for me so hopefully, someday, I don’t have to.
Should the companies we own continue to pay dividends at their current rate, with no changes, we can expect to earn just over $11,200 this year from our rather boring basket of Canadian stocks; averaging close to $940 per month for future retirement expenses.
Not every investor is comfortable with owning individual companies, I’m not. This is why Exchange Traded Funds (ETFs) complement the dividend stocks we own for the foreseeable future providing additional diversification for rock-bottom costs.
How are your retirement plans coming along? What are you investing in for cash flow?