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Boris S.'s avatar

In describing Systemic risk you mentioned macro risks of recessions, inflation, and crashes. I would add these risks may find themselves localized to a particular sector. For example, inflation may affect staples more than industrials. With that, I would say we should diversify a little bit among sectors. Don't hold 20 - 30 companies and have them all be staples. Also, the weighting is important - maybe even more so. You could have one bank holding T that outweighs everything, for example.

I'm a little guilty of having a lopsided portfolio as I am heavily tilted toward REITs.

As for the number, I am at 21 in my income portfolio and sometimes that feels like too much. 🥵 Personally, I would reduce the range from 20 - 30 to 10 - 20. But, that's just me.

My breakdown is ...

Business Development Companies - 5

Collateralized Loan Obligations (as a CEF) - 1

Energy (as a CEF) - 1

Financial Services - 1

mREIT - 1

REIT - 11

Staples - 1

I took some major steps in Jan 2025 to rebalance to that point and will now take a breather. There are more companies I want to research and understand but ... time ... never enough of it. 😉

Let's see how the year unfolds.

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TJ Terwilliger's avatar

I agree that you want to think about having companies with different exposures.

Even within your heavy REIT portfolio you can have some diversification - there are warehouse REITs, industrial REITs, housing REITs, retail REITs, etc.

The right number of companies is a personal choice. Somewhere between 20 and 30 is where the benefit of adding more companies really drops off in diversifying idiosyncratic risk.

Charlie Munger said 4 stocks was plenty of diversification. He used to say that if you owned the best apartment building in town, the highest quality office building in town, the McDonald's and the Ford dealership you were plenty diversified.

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