Is your portfolio overly concentrated?

A well-balanced, diversified portfolio is a joy for all seasons, giving something no matter what various markets or asset classes are doing. An overly concentrated portfolio is the opposite, a ticking time bomb volatile to fluctuations in macroeconomics and other influencers of the share price.

It’s a worry many South African investors don’t know about, yet some of them are probably in danger of just that.

Here are three red-flags that you could be in danger of an overly concentrated portfolio.

When you’re not equal with your equities

Equities has been the favoured asset in South Africa for some time now, thanks to its higher growth next to a gruelling property slump and unforgiving bond conditions. But equities, just like every other asset class, has its bad days, or rather years. In fact, just a few months ago, Moneyweb came out with an article proclaiming that local cash has outperformed local equities for a solid five consecutive years now.

When local isn’t lekker

Then there’s the fact that you might be investing in equities in what you think is a spread-risk, diversified way, but all of it’s in South African companies.

Allan Gray has this to say about the matter:

“South Africa has a relatively small equities market with a handful of dominant shares, spread across a few sectors, which are available to invest in. This presents a significant risk for investors: a highly concentrated portfolio.

“When compared to global markets, the Johannesburg Stock Exchange (JSE) is relatively small, comprising less than 1% of the total global investing universe. It is also highly concentrated, with the top 10 shares on the FTSE/JSE All Share Index (ALSI) making up between 50% and 60% of the index. In contrast, the top 10 shares in one of the world’s major indices, the S&P 500, make up just over 20% of the index. Most of the ALSI’s concentration comes from one share: technology giant Naspers, which makes up 20% of the index.”

Now, if that’s not putting your eggs in one basket, we don’t know what is. And for those who think to themselves: ‘well Naspers is a great bet, so are the others, so what’s wrong with investing in fewer but better market champions?’

We have one word for you: Steinhoff.

No one, apart from a very few smart people in Sygnia and Melville Douglas, ever saw the writing on the wall. Steinhoff was too big to fail, it was getting such great gains, it was even called that exact word: ‘champion.’ And when it did fail, it took hundreds of thousands of peoples’ hard-earned money with it.

When you’re overweight

No, we’re not talking about your body mass index here. Being overweight in a certain company, like Naspers for example, or even in something that seems a ‘safe bet’ like cash as an asset class. Being overweight in any one thing can jeopardise your wealth creation. A simple example: many people comb over their investment portfolio diligently, checking unit trust gains against the market and diversifying extensively, but when it comes to the retirement annuity their company has invested them into, they never check the weighting at all.

So, how do you do it right?

“Because of that consideration, I normally have a minimum of 10 investments in the portfolio and limit portfolio at risk (PaR) — defined as position size multiplied by the downside to the worst-case intrinsic value estimate — on any one investment to 5 percent at cost and 10 percent at market,” says Gary Mishuris on the CFA Institute website.

It’s a simple, moderate way to do it, but something that’s out of reach for the average investor trying to work it out on their cellphone calculator. This is where a professional financial adviser can help you quickly and easily. No centration required.

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