How Much is Too Much?
Is too much of a good thing a bad idea? Is there a limit on too much goodness…?
I’ve usually tried to keep my portfolio reasonably balanced over the years. I typically have ~15 stocks spread out over a several different sectors, an ETF or two, and some cash on the sidelines to be deployed at the opportune moment. I’ve never really set a specific limit on each individual position size; however, they tend to be roughly 2-5%. I’ve always felt that diversification is important, but I will load up on a sector if I feel strongly about it and its future potential and I have never really limited my sector position size either.
With all that being smy sector positiion portant, but I will load up on a sector if I feel strongly about it and it'aid, recently I’ve been debating if I need to implement a position and/or sector limit.
I’ve strongly believed in homebuilder stocks for the last 2-3 years now and began buying heavily in 2010 and again in 2011. Things were rather bumpy for the first year or so, but things have finally taken off the last year. This is great news and I’m obviously very happy with the returns I’ve generated. However, it has brought up a different issue, an issue that I am happy to have, but an issue nonetheless.
One of my favorite homebuilder stocks is MDC. An extremely well run builder that was buying land as fast as it could early post RE collapse when deals were to be had. It also paid out a nice dividend while you waited out the housing storm. MDC has finally started to show positive signs of life, turning a profit in 2012.
With that being said, MDC has become one of my largest holdings and now makes up almost 10% of my portfolio. As I stated above I’ve never really set limits on my position size, but this is starting to make myself rethink that strategy.
My basket of homebuilder stocks has also been growing to a slightly uncomfortable size. The sector now makes up ~20% of my portfolio. Again, I’ve never really considered placing limits on sector bets. I’ve certainly placed several in the past, but they never have become this big before.
I‘ve been reviewing my homebuilder stocks and the sector in general lately and still feel confident in them (I’ll try and post some thoughts this week). So I don’t necessarily want to sell any of them, nor do I think I ultimately will. I am just thinking out loud her and wanted to hear other opinions.
I believe in diversity and think it is always a good idea; however, if you feel strongly in something there is nothing wrong with placing a large bet to back that up. I guess that is my justification for holding such a large position in this sector.
So what do you say Fools, do you limit your position sizes? Limit the amount of your portfolio in one sector? Thoughts?