The holidays are behind us now. It’s time to get to work trimming down… your portfolio.

As I’ve been saying for much of the past year, individual investors have incredible advantages over large investors and institutions. One of those advantages is the ability to have more concentrated portfolios.

We’re going to start 2018 off with some strategies for trimming down your personal portfolio, but first I’d like to share with you even more inspiring evidence that when it comes to the number of investments you hold, less is indeed more.

It’s easy to keep adding positions in your portfolio until they become too difficult to manage. You get some new recommendations from your newsletters that sound interesting, or you do your own research to find new stocks. And, heck, we’re in the middle of an incredibly strong bull market… It’s very tempting to buy new stocks.

But managing a large number of stocks is difficult, even with the TradeStops tools. Concentrated portfolios are easier to manage and you have a much greater likelihood of beating the market averages.

Two weeks ago, we showed you that having a smaller portfolio with 20-60 stocks can outperform a portfolio with 100 stocks or more.

We’ll start out this week with more compelling evidence – this time from the NASDAQ.

The Data

The NASDAQ Composite Index (COMP) has about 3000 stocks. The NASDAQ 100 Index (NDX) is composed of about 100 of the largest non-financial stocks that make up COMP.

Over the past 15 years, including the financial crisis in 2007-2009, the smaller NDX outperformed COMP by about 20%.

NDX outperforms the COMP by 35%

So far so good… but as we mentioned earlier, we think even 100 stocks is too many for an individual investor to own. So we took the NASDAQ 100 and applied our Pure Quant portfolio building strategies to winnow the portfolio size down even further.

(If you missed it, our research and education specialist Tom Meyer covered the basics of our Pure Quant strategy as applied to the Dow Jones Industrial Average yesterday.)

We ran the Nasdaq 100 Index through our Pure Quant tool to see what the results would be with portfolios of 20-50 stocks. The results were even more dramatic than I anticipated.

Comparison in Pure Quant of Nasdaq 100 index with smaller portfolios

The smallest portfolio size beat out all the other strategies. The 20-stock portfolio outperformed the NASDAQ 100 by 45.3% and it outperformed the NASDAQ Composite by 74.3%!

Back in August, we showed that only owning 5 stocks gave considerably worse results than even the S&P 500.

Pure Quant comparison reveals owning too few of stocks underperformed S&P 500

The Takeaway

With too few stocks, you’re taking oversized risk in each position and exposing yourself to large downside moves. With 20 stocks, and using equal risk per position, a loss in one or two positions won’t crush your portfolio.

We’ll be diving deeper into portfolio trimming strategies next week. To get ready for that I suggest that you review Tom Meyer’s education piece from yesterday and focus on the first two rules of the Pure Quant strategy in particular:

  1. Stay out of the SSI Red Zone
  2. Invest in stocks that have most recently entered the SSI Green Zone

Getting ready for a profitable 2018,

Richard_Signature

Richard Smith, PhD
CEO & Founder, TradeSmith