Smart share portfolio allocation: how to get it right

Whilst it may sound fancy, ‘share portfolio management’ simply describes the art of deciding what proportion of your capital is allocated to a single stock or sector.

While you may have given little thought to portfolio allocation (aka portfolio weightings) when you first started buying shares, the risks of getting it wrong only intensifies the more you have invested in the stock market.

The good news is there’s nothing cerebral about getting your share allocation mix right.

One of the core tenants of clever portfolio allocation is ‘good old’ diversification, and the need to avoid putting too many investment eggs in one basket. That’s because not all stocks or sectors will outperform (or underperform) at the same time, so by spreading your capital across different stocks and sectors you’ll build in a natural hedge against that eventuality. When some stocks do well, they’ll offset those that don’t and balance out your overall portfolio performance.

Portfolio allocation and your risk profile

The capital that you allocate to individual stocks should accurately reflect your investor type and the risk profile you have - not the risk profile you fancy having – plus your need to balance growth with income. There’s little to gain from seeking out speculative growth stocks if you’re investment plan specifies you require top stocks paying fully franked dividends.

By focusing on the best stocks to buy, you won’t by default degrade share investing to a game of chance. You’ll also avoid poor quality stocks that could inflict significant damage to your portfolio over time.

Forget set and forget

Given that the share market is a constantly moving feast, managing your share portfolio allocation can no longer be relegated to a ‘set and forget’ strategy.

Whilst there might be an argument for having more of your portfolio exposed to a single sector, like mining when commodity prices are high, the opposite also applies. Similarly, industrial stocks will move in and out of favour depending on where we are in the economic cycle. The portfolio allocation decisions you make should be mindful of these considerations.

Individual stock allocation

While there might be an argument for allocating 25 per cent of your portfolio to a single sector, the amount exposed to any single stock will depend somewhat on the total amount of capital you have invested, plus your credentials as a stock picker.

Even the world’s best stock pickers get it wrong. Having more than six to 10 per cent of your total portfolio value exposed to any single stock probably isn’t a great idea.

Time to sell?

Good share portfolio allocation is as much about what you buy as it is about what you sell and when. When share prices rally beyond the intrinsic value of a business, the argument for locking in the gain, while possibly maintaining a core holding and moving into the market’s next best opportunity, is a good strategy.

What’s the optimal number of stocks to own?

There’s no copybook answer to how many stocks you should have in a portfolio, but how much you have to invest will provide some useful guidelines.

If you’re starting to build a share portfolio with $20,000, you’re better off investing in a handful of top stocks within those sectors that dominate the ASX by market cap

Remember: limit your individual stock exposure to no more than six to 10 per cent of your total portfolio value to avoid a blow up of your portfolio.

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