Diversification - Is a 10-way split enough?

A Random Walk

Here's a snippet from All About Money.com's savings and investments guide

Ten shares is certainly enough to get adequate diversification. There is a misconception that you need hundreds of shares to be fully diversified, but this is incorrect. Having bought 10 shares, the 11th and each subsequent share reduce the risk by negligible amounts.

The answer to diversifying overseas is less clear cut. For most people diversifying overseas is not really an option. Buying shares in overseas companies, apart from the UK, is expensive and is a major administrative headache. There probably is some useful risk reduction gained by investing in European shares, but I doubt if it is significant enough to warrant the extra hassle involved.

10 companies = adequate diversification - for a gambler perhaps, that exposes an investor to a potential 10% loss of their portfolio from movements of just a single company.

There is "probably...some useful risk reduction..investing in European shares..." - no sensible investor would put 100% of their money into just Irish shares, telling them it is too much hassle and does not make much difference would see investors completely exposed to risk if there is a downturn in the Irish economy alone. Not to mention they miss out on equity returns from every other part of the globe. This line made a little part of me die.

Buying shares outside the UK and Ireland is "expensive" - I'm lost, was this thing written in some pre-Internet era?

Are you really saying that you would recommend novice investors read this and act upon it?

RainyDay

A Random Walk wrote:

Here's a snippet from their savings and investments guide

10 companies = adequate diversification - for a gambler perhaps, that exposes an investor to a potential 10% loss of their portfolio from movements of just a single company.

There is "probably...some useful risk reduction..investing in European shares..." - no sensible investor would put 100% of their money into just Irish shares, telling them it is too much hassle and does not make much difference would see investors completely exposed to risk if there is a downturn in the Irish economy alone. Not to mention they miss out on equity returns from every other part of the globe. This line made a little part of me die.

Your knowledge of the Irish top ten companies is weak. The top ten companies on the Irish market by market cap are as follows;
DIAGEO PLC
TESCO PLC
C R H PLC
ALLIED IRISH BANKS PLC
BANK OF IRELAND
ANGLO IRISH BANK CORPORATION PLC
RYANAIR HOLDINGS. PLC
ELAN CORPORATION PLC
IRISH LIFE AND PERMANENT PLC
SMURFIT KAPPA GROUP PLC

These companies earn substantial amounts of their earnings outside of Ireland (e.g. Diageo - worldwide, Tesco - UK & beyond, CRH - US & Europe, AIB - US & Poland, BOI - UK, Anglo-Irish - UK, Ryanair - UK & EUrope, Elan - worldwide, Smurfit Kappa - worldwide). Investing in these companies gives you substantial exposure to UK, US & European economies, not just the Irish economy.

A Random Walk wrote:

Buying shares outside the UK and Ireland is "expensive" - I'm lost, was this thing written in some pre-Internet era? Are you really saying that you would recommend novice investors read this and act upon it?

Not quite 'pre-Internet era', but the guide has been around for a long time. Have you every tried buying European shares from a European broker directly? Have you tried getting dividend payments from a European company? Have you tried setting up a US brokerage account? While none of these things are impossible, they are logistically difficult, and the costs involved can be significant.

However, I would never claim that the 10-way split is perfect, and there is always room for improvement.

Time Magazine

RainyDay wrote:

Feel free to split out to a seperate thread if you wish. In all fairness, if you allow the criticisms to stand, you have to allow them to be answered.

I agree with you that criticisms are to be responded to. But a thread (and a stickied thread at that) should not get into the moderation of another site. I've thus done my best to clean up that thread to keep it on topic, and made this a diversification thread where you can argue about certain tactics advocated, e.g. AAM's.

A Random Walk wrote:

I'll respect Ibid's request by posting any else related to this thread over here.

Thank you. Feel free to post on-topic here.

Discussion about any other forum (as distinct from advice given) is off-topic. Keep clear of personal abuse lads; attack the post not the poster. I think I've given you both fair warning at this stage.

P.S. if ye're not happy/want something edited, send me a PM (or head to Feedback).

ChartTrader

[I]Have you every tried buying European shares from a European broker directly? Have you tried setting up a US brokerage account? While none of these things are impossible, they are logistically difficult, and the costs involved can be significant. [/I]

I don't understand how you can say this. It's very easy to set up such accounts. As for costs, fees for wiring money are small and Euro/US brokers are way, way cheaper than their Irish counterparts.

PDelux

Re the 'major administrative headache' I think that was probably written along time ago.

DIAGEO PLC
TESCO PLC
C R H PLC
ALLIED IRISH BANKS PLC
BANK OF IRELAND
ANGLO IRISH BANK CORPORATION PLC
RYANAIR HOLDINGS. PLC
ELAN CORPORATION PLC
IRISH LIFE AND PERMANENT PLC
SMURFIT KAPPA GROUP PLC

this list is weighted towards the financials, 4 out of 10.
Is this a bad idea?
I'm asking because i noticed my pension fund is like this too.. which surprised me.

A Random Walk

PDelux wrote:

this list is weighted towards the financials, 4 out of 10.
Is this a bad idea?

It is a bad idea if something happens financials as a group e.g. a slowdown in the Irish economy. You'll notice that it is also very heavily Irish & UK construction related (Anglo, almost 100% dependent, as is BOI. AIB, IL&P, CRH, Ryanair somewhat dependent).

A breakdown in the Irish property market or a slowdown in the Irish economy will impact this list substantially, which is why investing solely in 10 Irish quoted shares cannot be considered adequate diversification.

Irish pension funds - you might want to read some past articles by Shane Ross where he talks about the shareholdings Irish pension companies hold in other Irish companies. It's sometimes quite incestuous.

dunkamania

The advice was written a few years ago,the modern solution would be ETF's.

Buy global indexes through your local broker,and less hassle with the div's

Sonnenblumen

A Random Walk wrote:

It is a bad idea if something happens financials as a group e.g. a slowdown in the Irish economy. You'll notice that it is also very heavily Irish & UK construction related (Anglo, almost 100% dependent, as is BOI. AIB, IL&P, CRH, Ryanair somewhat dependent).

Irish pension funds - you might want to read some past articles by Shane Ross where he talks about the shareholdings Irish pension companies hold in other Irish companies. It's sometimes quite incestuous.

Grossly incorrect as any casual reading of the individual company annual reports will confirm.

Not surprising if Shane Rosss is being put forward as an authority. Again a 1st student researcher would be able to determine the facts.

Shane Ross talks a load of bollox - most of the time anyways.

Time Magazine

Would you like to back up that claim about him talking bollox, Sonnen? Many examples?

PDelux

It is a bad idea if something happens financials as a group e.g. a slowdown in the Irish economy. You'll notice that it is also very heavily Irish & UK construction related (Anglo, almost 100% dependent, as is BOI. AIB, IL&P, CRH, Ryanair somewhat dependent).

This is what I was thinking. If the group is doing very well then it's fine but if the economy turns, wouldnt the pension fund manager just move the money out of them and into something else? Is this too simplistic? I'm not sure exactly how pension funds are actively managed.

A Random Walk

Sonnenblumen wrote:

Grossly incorrect as any casual reading of the individual company annual reports will confirm.

Care to enlighten us?

A Random Walk

PDelux wrote:

This is what I was thinking. If the group is doing very well then it's fine but if the economy turns, wouldnt the pension fund manager just move the money out of them and into something else? Is this too simplistic? I'm not sure exactly how pension funds are actively managed.

If, say, the ESRI report due out soon shows a big drop in Irish house prices, you'd likely have the share prices of multiple Irish companies drop. You'll have foreign and Irish investors getting nervous in terms of our banks and any stocks seen to be construction related.

Sure your pension fund manager can move money, but it may be too late by the time they move. A pension fund is your retirement money, don't be afraid to ask the trustees whether they feel there is adequate diversification in their choice of pension providers.

It's not unusual to find a concentration of Irish companies in your pension fund, the manager probably has a greater knowledge of such companies and Ireland inc in general and feels they can find better investment opportunities there.

Sonnenblumen

A Random Walk wrote:

Care to enlighten us?

Well why don't you read the reports and come back with corrections to your previous erroneous statements regarding specific companies dependency on the Irish market.

I mean how wrong can you be to suggest that Anglo is 100% dependent on the Irish market? Even Shane Ross wouldn't say so much and he knows so little!

Time Magazine

Sonnenblumen wrote:

I mean how wrong can you be to suggest that Anglo is 100% dependent on the Irish market? Even Shane Ross wouldn't say so much and he knows so little!

I'd take it you're not going to respond to my request that you back up your assertion that he "talks a load of bollix" and now that he "knows so little" with any substantive points, no?

A Random Walk

Sonnenblumen wrote:

I mean how wrong can you be to suggest that Anglo is 100% dependent on the Irish market? Even Shane Ross wouldn't say so much and he knows so little!

I said that some companies are very heavily dependent on UK and Irish construction (some almost 100%). And yes Anglo is from my perspective is pretty much a leveraged play on construction & property. At least read what I say before you start firing out brickbats

Sonnenblumen

Ibid wrote:

I'd take it you're not going to respond to my request that you back up your assertion that he "talks a load of bollix" and now that he "knows so little" with any substantive points, no?

He writes a sleazy aimless business piece and I couldn't be bothered to begin to 'substantiate' the tosser's credentials. Business Editor thats a joke.

But on the otherhand if you have compelling evidence on Ross's credentials, well why not share it with the readers.

A Random Walk

Sonnenblumen wrote:

But on the otherhand if you have compelling evidence on Ross's credentials, well why not share it with the readers.

He's an ex stockbroker, a Senator and Business editor of the most popular weekend broadsheet in Ireland. You on the other hand....

Sonnenblumen

A Random Walk wrote:

He's an ex stockbroker, a Senator and Business editor of the most popular weekend broadsheet in Ireland. You on the other hand....

business editor of (chattering business gossip) what thats the Sunday sleeze well so what?

ex stockbroker what did he do?

a senator - what has he achieved??

he's also an aspirant auctioneer, big deal, no qualifying criteria, open shop, lets see him compete @ 1% commission.

He's also a mouthpiece for whinging loss causes etc etc.

IMO a cynical patronising and depending on his target a condescending tosser.

But who are you?