Here’s our Club Mailbag email investclubmailbag@cnbc.com — so you can send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only consider more general questions about the investment process or portfolio stocks or related industries. This week’s question: I thought Jim mentioned having about five stocks in a portfolio with a maximum stake of 5% in each stock. But if you only own five companies, the numbers would dictate $100,000 or $200,000 in each stock, respectively, if you have $500,000 or $1 million of discretionary money to invest. That’s a lot of eggs in a few stocks, but you can’t manage tracking more than 5 stocks. Thank you in advance for the details. — Ramon There are a few factors to consider that will make things a little more manageable. First, our recommendation is that the first $10,000 be invested in a low-cost S&P 500 index fund. This position can be larger than $10,000 – and probably should be – if you manage a larger portfolio. Then you can add individual stocks to the mix. At the Club, we tend to use a 5% weighting threshold for individual stocks, given the number of companies we own. But for individual investors who own fewer names, we wouldn’t be opposed to a slightly higher threshold – perhaps around 10% each. Portfolio management can be both an art and a science, and this consideration is art. Your position size limit will depend on how much time you can devote to homework on your companies and your risk tolerance. Weighting a given position, whatever it may be, should not cause you to lose sleep or experience regular discomfort. We tend to think in percentage terms, but we also shouldn’t lose sight of how much money, in real dollars, is actually at stake. We tend to think that 10 stocks is a good limit for a single person , or a maximum of 15 if you are willing to spend time doing your homework. Another quality option if you have extra capital to invest, but don’t want your stock positions to grow to a precarious size: simply allocate more money to your S&P 500 index fund. The math to consider Let’s put some numbers in behind that. Let’s say you manage a million-dollar portfolio, but you decide you’re not comfortable risking more than $50,000, or 5% of your portfolio, on a single company. That’s a perfectly acceptable conclusion and would mean about 10 shares at $50,000 each. This all adds up to $500,000 or 50% of your money in your basket of individual stocks. In this scenario, increasing your S&P 500 index fund weighting can help close the gap, allowing your stock positions to remain at a size and quantity that you are comfortable with. Keep in mind: A million-dollar portfolio with just $10,000 in an S&P 500 index fund results in only a 1% weighting for that fund. Since the S&P 500 itself is a diversified portfolio, you can consider increasing this allocation as much as you want until you reach the total level you want to invest in stocks. Consider a portfolio of 10 stocks with a 5% weighting in each name and maintaining a cash position of approximately 10%. This means that, in theory, you could increase your allocation to S&P 500 index funds by up to 40%. This may seem like a large weighting, but remember that it is spread across all 500 companies, covering all 11 sectors of the index. Another option is to evaluate exchange-traded funds that invest based on the themes and trends you want exposure to. These are known as thematic ETFs, such as one focused on cybersecurity or cloud computing companies. A sector ETF is also an option if you feel you need exposure to a given economic sector, but may not want to follow it closely or select a single company to hold. Other ETFs provide exposure to companies based on their market capitalization, geography and asset types. When considering narrowly focused ETFs, just be sure to look at the holdings in the fund and think about the impact that has on diversifying your overall portfolio. Additionally, it’s important to look at an ETF’s expense ratio — you don’t want to hinder long-term gains by paying higher fees than necessary — as well as its size and daily trading volume. Size and volume are both indicators of liquidity, and liquidity is the key to getting your money in and out easily at market prices. One final thought: don’t forget to factor liquidity into your portfolio weighting, which should be based on your short- and medium-term market outlook. (See here for a complete list of Jim Cramer’s Charitable Trust stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.Technology stocks exposed to the Nasdaq.
Pierre Kramer | CNBC
Here’s our Club Mailbag email investclubmailbag@cnbc.com — so you can send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only consider more general questions about the investment process or portfolio stocks or related industries.
This week’s question: I thought Jim mentioned having about five stocks in a portfolio with a maximum stake of 5% in each stock. But if you only own five companies, the numbers would dictate $100,000 or $200,000 in each stock, respectively, if you have $500,000 or $1 million of discretionary money to invest. That’s a lot of eggs in a few stocks, but you can’t manage tracking more than 5 stocks. Thank you in advance for the details. -Ramon
