Is an Equity Strategy with 60 Holdings Over Diversified?

Is an Equity Strategy With 60 Holdings Over Diversified? Why Capital Wealth Focuses on Concentrated Portfolios.

If you go to a typical portfolio manager or broker at a large financial investment advisory firm, you will in most cases be pitched on the value of a closed end fund that offers diversification and the advisor some type of commission payment for selling it to you. Many of these funds could own anywhere from 50 to 150 stocks or even hold multiple asset classes. For purposes of simplicity, we will only focus on equity funds throughout this discussion. The thinking behind such a diversified fund is to give you a wide range of stocks with the hope of thereby managing your risk effectively and offering diversification to your investment portfolio. The question though for you as an advisor or individual investor is how is this managed effectively?

Keeping track of 100 to 150 stocks for each of your clients daily is a lot to manage. In fact, it can be impossible to truly manage well. As Warren Buffett explains, “Wide diversification is only required when investors do not understand what they are doing.”

At Capital Wealth Planning, we suggest a different approach. We follow and focus on a concentrated portfolio of 20 to 26 blue chip household stocks over 10 S&P sectors.  We do not invest in REITs, and  ADRs. This helps us not spread ourselves too thin and to be able to effectively manage our clients’ accounts.

The 20 Stock Concentrated Portfolio

With a concentrated portfolio of 20 -26 stocks, you also face a marginal risk in your investment. Adding more than 20 stocks does not dramatically improve your portfolio’s diversification or lower risk, but what it most likely will cause is lack of focus and insufficient planning. As we have learned, adding more stocks past a portfolio of 20 does not increase diversification by much. Instead, we recommend a concentrated portfolio strategy.

Benefits include:

1) One Simplified, Lower Fee

Our Broker Management Platforms charge just one fee to manage your client’s money, receive financial advice and take commissions on trades. The annual fee ranges anywhere from 1% in some cases with larger accounts to 1.5% for smaller accounts.

2) Lower Threshold for Entry

Because our strategy writes covered call options against the underlying securities, a concentrated portfolio strategy is a great product for the middle market investor who has roughly $250,000 and up to invest and can benefit from strategies that were at one time only available to institutional, endowment and trust investors only. Instead of requiring 1.25 to $1.5 million to invest, mainstream investors can just place their capital in 20 stocks and benefit from the value given typically only to larger investors.

3) Reap Dividends and Covered Call premiums without Capital Taxes

Your clients can enjoy the benefits of receiving a regular dividend income and option premium without having to pay capital taxes via qualified accounts that are not taxable.

4) Covered Call Strategy

Your clients also benefit from using our Covered Call Strategy, which is part of our financial strategy. Capital Wealth Planning advisors would function as covered call managers for your clients, helping both you and your clients benefit from this results-driven, sensible approach.

At Capital Wealth Planning, our investment approach is based on value creation through the framework and process of the portfolio. We assess the relationship between valuation and financial productivity for each individual security. From our experience and study, we have determined that by adding a concentrated strategy, investors can benefit from the returns and investment ideas based on the fundamental value investing through the collection of dividends and option premium without lowering performance brought about by over-diversification. By employing a concentrated portfolio strategy, investors can reap value from a focused approach where investing leads to driving outperformance based on the measure of risk taken.

Contact us to learn more!