Is Diversification Important in the Accumulation Phase?

One of the common themes that is included in most investment books is the need to maintain a properly diversified portfolio. Most recommend that you hold a minimum of 5-10 stocks in your portfolio and that no sector account for more than 20% of your total portfolio. A lot of other dividend growth investors prefer to maintain a portfolio size of at least 35-50 stocks so that if any holding cuts or eliminates their dividend, the loss in annual income will not be so great that it isn’t made up by dividend raises from other stocks.

If you have seen my portfolio page, you will see that not only do I not have that many positions but that I also am not very diversified by sector either. REIT’s and oil stocks make up a disproportionate amount of my portfolio and I have received many questions since starting this blog in regards to my diversification. Right now, being in the very early years of the accumulation phase I am comfortable not being diversified.

Instead of adding new positions just for the sake of diversifying into new sectors and balancing out my portfolio more right now I am content to continue adding whatever company presents good value at the moment and fits with my current goals. For example over the past year wanting to increase the overall yield of my portfolio and jumpstart my dividend income I invested a lot in oil companies, adding to my positions in Chevron, BP and Exxon Mobil. With the oil majors all trading at fair and undervalued prices due to the decline in oil prices I was able to both increase the yield of my portfolio while also getting great companies at a fair price.

Personally I believe diversification only becomes truly important as you get closer to actually living off of your dividends. Obviously I wouldn’t want REITs and oil stocks to continue to make up such a large percentage of my portfolio once I’m actually ready to retire early. My tentative goal right now is to be equally balanced in a few years after I have the chance to start some more positions. In the meantime though, I plan on continuing to load up on stocks that present good value and worry about becoming completely balanced out later down the road.

So what do you think? Do you think it is necessary to have a diversified portfolio when starting out or do you think diversification is something you can ignore for a while you build up your portfolio?

2 comments

  1. I agree with you, I believe there is value in diversification as we are better protected in a downturn or cyclical change. But when you are just starting out, I’d say it is OK not to worry about it too much. Keep it in the back of your mind but don’t let it discourage you from picking up what otherwise would be a great value at the time. Personally, I think people starting out are best served just making sure they have a solid foundation of large companies with a long history. Diversification is important, but not more than having a solid foundation when you are just starting out.

    Thanks for sharing. AFFJ

    1. AFFJ,
      You make a good point of having a solid foundation of large companies with long dividend histories. Building up my foundation stocks: AT&T, Johnson & Johnson, Coca-Cola, etc. is one of my goals for 2016 but mostly I’d like to take advantage of whatever stocks are trading at a good value.

      Thanks for commenting!
      -SFZ

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