Tuesday, 19 July 2011

Portfolio Construction: What is the maximum percentage that a single stock should be within the portfolio?

After having answered the first question on portfolio construction (read about it here), the next question that came to me was about the maximum percentage that a single stock should constitute in one's portfolio. Again, there is no "rule" which prevents you from having your 90% of your equity networth invested in one stock. But like the decision to diversify, here also, I personally comfortable to invest up to 25% in one stock. But that would be really rare. I have to be very very convinced of the story and the fact that my downside is limited for me to go to that extent.

I had in two occasions invested close to 25% in one stock. One was in Tata Motors at 100-110 levels. I sold it off around the 980-990 levels after it had failed to break the Rs 1000 barrier and I got frustrated holding on to it :-)

The second instance was Supreme Industries. I had invested around the 40-45 levels (split adjusted). The downside was limited by their real estate value of their Andheri complex. It has since moved to 200+ levels. Although, I have not yet sold my positions in Supreme, the portfolio weightage has reduced because I have added other stocks.

In general, I prefer to have somewhere close to 5%-10% invested in one stock. I typically increase or decrease the position based on market price and my conviction level.

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