Here’s our Club Mailbag email [email protected] — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week’s question: I thought Jim mentioned having around five stocks in a portfolio with no more than a 5% holding in each stock. But if you only own five companies, the numbers would dictate $100,000 or $200,000 in each stock, respectively, if you have $500,000 or $1 million of discretionary money to invest. That’s a lot of eggs in a few stocks, but you can’t handle tracking more than 5 stocks. Thank you in advance for the clarification. — Ramon There are a few factors to consider that will make things a bit more manageable. First, our recommendation is the first $10,000 be invested into a low-cost S & P 500 index fund. This position can be larger than $10,000 — and arguably should be — if you’re managing a larger portfolio. Then you can add individual stocks to the mix. At the Club, we tend to use a 5% weighting threshold for individual stocks, given the number of companies we own. But for individual investors who own fewer names, we wouldn’t be opposed to a slightly higher threshold — perhaps about 10% each. Portfolio management can be both an art and a science, and this consideration falls under art. Your limit for position size will depend on how much time you can spend doing homework on your companies and your risk tolerance. The weighting of a given position, whatever it is, should not have you losing sleep or regularly feeling uncomfortable. We tend to think in percentage terms, but we also should not lose sight of how much money, in actual dollar terms, is actually on the line. We tend to think 10 stock is a good limit for a single person, or at most 15 if you’re ready to commit the time to do the homework. Another quality option if you have additional capital to invest, but don’t want your stock positions getting to an uneasy size: simply allocate more money to your S & P 500 index fund. The math to consider Let’s put some numbers behind it. Let’s say you manage a $1 million portfolio but decide you aren’t comfortable risking more than $50,000, or 5% of your portfolio, on any one individual company. That’s a perfectly acceptable conclusion and would mean roughly 10 stocks at $50,000 each. All in that’s $500,000 or 50% of your money in your basket of individual equities. In this scenario, bumping up your weighting of the S & P 500 index fund can help fill the gap, allowing your stock positions to remain at a size and quantity you’re comfortable with. Keep in mind: A $1 million portfolio with only $10,000 in an S & P 500 index fund translates to a mere 1% weighting for that fund. Given the S & P 500 is itself a diversified portfolio, you can consider increasing that allocation as much as you want until you reach the total level you want to be invested in equities. Consider a 10-stock portfolio with a 5% weighting in each name that keeps a roughly 10% cash position. That means, in theory, you could boost your S & P 500 index fund allocation to 40%. That may seem like a hefty weighting, but remember it’s divided across the 500 companies, spanning all 11 sectors in the index. Another option is to evaluate exchange-traded funds that invest based on themes and trends you want exposure to. These are known as thematic ETFs, such as one focused on cybersecurity or cloud-computing firms. A sector-based ETF is also an option if you feel you need exposure to a given economic sector but perhaps don’t care to follow it closely or select a single company to own. Other ETFs offer exposure to companies based on market capitalization, geography, and asset types. When considering narrowly focused ETFs, just be sure to look at the holdings inside the fund and consider how that impacts the diversification of your overall portfolio. Also, it’s important to look at the expense ratio for an ETF — you don’t want to hamper long-term gains by paying higher fees than is necessary — along with its size and daily trading volume. The size and volume are both indicators of liquidity, and liquidity is the key to getting your money in and out with ease at the market price. One final thought: Don’t forget to factor cash into your portfolio weighting, which should be based on your near-to-medium-term outlook for the market. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Tech stocks on display at the Nasdaq.
Peter Kramer | CNBC
Here’s our Club Mailbag email [email protected] — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries.
This week’s question: I thought Jim mentioned having around five stocks in a portfolio with no more than a 5% holding in each stock. But if you only own five companies, the numbers would dictate $100,000 or $200,000 in each stock, respectively, if you have $500,000 or $1 million of discretionary money to invest. That’s a lot of eggs in a few stocks, but you can’t handle tracking more than 5 stocks. Thank you in advance for the clarification. — Ramon