"The only investors who shouldn't diversify are those who are right 100 percent of the time."
- John Templeton
"An investor should act as though he had a lifetime decision card with just twenty punches on it."
- Warren Buffett
"Diworsification is investing in too many assets with similar correlations that will result in an averaging effect."
- Concept made famous by Peter Lynch in 'One Up On Wall Street'
The three quotes above speak to the inner turmoil I feel when I think about how to diversify or further concentrate my holdings in 2016. I know for a fact that I'm not right 100% of the time, and therefore must diversify. However, I fear as I add investments to my portfolio, diworsification is real risk. Many of the asset classes I invest in as a dividend growth investor ("DGI) are highly correlated. I'm also a big fan of the Warren Buffett 'punch card' approach, and prefer to concentrate my money in companies in which I have the most confidence and understanding.
Among the many things I struggle with as a DGI located in Canada, sector diversification is near the top of my list. Although nearly 20% of my investment holdings are in the Canadian banking sector, banks actually account for 39% of the TSX Composite Index. Similarly, my 17% weighting of energy and pipelines is slightly lower than the 18% weight in the TSX Composite Index.
After completing the above table last weekend, a couple of observations stood out:
Home Country Bias
With about 34% of my holdings in Canadian companies, I'm not as globally diversified as I should be. However, one of the big reasons for my home country bias is the favorable tax treatment of Canadian dividends, and unfavorable tax treatment of foreign dividends. Unless I receive foreign dividends in my RRSP, there is withholding tax deducted, and I also may be taxed at my marginal rate on net foreign dividends received.
Sectors Not Represented
Certain sectors, such as mining, infrastructure, retail, and transportation are missing from my portfolio. Although there are specific, rational reasons for some sectors not being represented (like my complete lack of knowledge regarding mining), other reasons are irrational (like being burned once by SNC in the infrastructure sector, and choosing to avoid being burned again), or completely lacking (Magna is a successful Canadian transportation company with a global presence and an impressive history of dividend growth).
Cash Level is Low
In contrast to 2014 during which I made a couple large purchases using cash contributed to my brokerage account quarterly, in 2015, I contributed to my brokerage accounts each month, as a way to encourage myself to make regular, smaller purchases. Since I've made regular, smaller, monthly purchases, I now have a lower cash balance to take advantage of exceptional opportunities as they arise.
Relatively Low Number of Holdings due to Monitoring
I pared down my number of investments from 29 at the end of 2014 to 26 currently. I find it's still a stretch for me to monitor so many holdings, even with six Canadian banks whose results are highly correlated. Although I see many other DGI bloggers with portfolios of 30-60+ companies, I simply can't effectively monitor that many investments given time constraints. Although, through Alaris, I gain exposure to 14 different companies, which further increases my sector and geographic diversification.
As I formulate my investment plan for 2016, I'm interested in hearing from my readers how they balance diversification and diworsification. Any tips, techniques, or insights you have regarding balancing monitoring, diversification across asset classes and geographically, and eliminating home country bias in your portfolio, would be much appreciated.
Do you consider your investment portfolio diversified?