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When are new investment ideas a bad idea for your portfolio?


Warren Buffett once gave his personal pilot a lesson on how to better manage his time and accomplish the things that he truly cares about in his lifetime. He called it his 25/5 rule and here's how it works:

25/5 Rule Breakdown

- Write down a list of your top 25 career goals

- Circle the five most important goals that truly speak to you. These are the most urgent and highest priority for you.

- Cross off the other 20 goals you have listed that hold less importance

Since the other 20 goals are not as important to you, Buffett suggests that you shouldn't use any effort in trying to accomplish them or give them any focus. Instead, you should focus your research and energy on achieving your top five goals.

Now this rule has been somewhat debunked and in 2013 Buffett himself even said that he's not disciplined enough to make lists and follow rules this way but I think that the principle behind the rule still has value especially when you apply it to your investment decisions. How many good ideas do you need to have in your portfolio? Over the last few years, fad investing has reached euphoric levels. We've had marijuana companies, crypto currency, electric car makers and even meme stocks the epitome of fad investing! Everyone and their dog has the next latest and greatest investment idea but how many ideas do you really need?

Using the 25/5 Rule in Investing

Taking a variation on the 25/5 rule, you should really only invest in your top ideas, otherwise you are wasting resources on ideas that are your 50th best idea or your 100th best idea. You have to start asking at some point, how good are those ideas really? The other side of it, are those ideas spreading you to thin so that you cannot pay enough attention to your top ideas? What happens if something has changed in a company's management that you invest in and you don't have your eye on the ball?


Peter Lynch, in his book "One Up on Wall Street" introduced the concept of "diworsification". He came up with the concept to explain the risks of over diversifying your portfolio where each no holding, instead of adding value is actually worsening your portfolio. In his book he outlines the telltale signs of diworsification which include:

- You can't explain why you own a stock. What is the type or investment strategy?

- You have too many stocks to keep track of-you frequently come across stocks that you forget you own

- You buy stocks just so you can increase the number of holdings in your portfolio

- You buy a stock at a nosebleed valuation just because it's cool to own it. FOMO anyone??

Comfort Level of Volatility

The number of holdings you should have really depends on the individual, your plan and your comfort level for volatility. Some portfolios are best with as few as 10-15 individual holdings, others, 50+. But what is important is that you don't need to chase every single good idea that is out there because your neighbor just made 10 times their money on the latest crypto currency or penny stock. The next 10 times is a lot harder than the first so do not throw your good money at bad ideas.

Focus on your best ideas and in time you will build true and long lasting wealth. Envy doesn't look good on anyone.

-Grant White, CIM, CFP

Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Grant White who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.


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