Limiting Exposure

Someone who follows my blogs asked a question the other day. It was "I was wondering what your views are regarding the weight of each stock in a portfolio? I have seen some people recommending a maximum weight of 10% while others feel 5% is safer. What weighting do you use in your own portfolio?"

The maximum weighting probably depends on the size of your portfolio. I started off with 3 stocks from 3 sectors and built up my shares before moving on to other stocks. When I got a sizable portfolio, I limited my exposure of any one stock to 10%, and now as my portfolio has gotten bigger, I am limiting my exposure to 5%, although a few a bit higher, but not by much.

However, you should also limit your exposure to different investment sectors. People often talk about a division between fixed income investments and stock investments. I used to do this, but fixed income has not been a category I have invested in for a while. I sold my last bond in 2007. There is just not much money to make there, but there are lots of people who disagree with me on this.

There should be limits to exposure to different stock investments. The most common way is to use the MX sectors of Consumer Discretionary, Consumer Staples, Metals and Mining, Energy, Financial, Health Care, Industrials, Information Technology, Materials, Telecommunication Services, Utilities and REIT. Some people use similar but slightly different categories.

It does not matter how you categorize stocks; you should think about what sorts of things you want to be exposed to. I personally limit my exposure to Metals and Mining and Materials categories. I have little. I also limit exposure to Energy. I have nothing in Health Care. The problem I have with these categories is that they are not the sort of stocks you can tuck away in your portfolio and forget about.

I think that last thing to talk about is when buying stocks. If a stock is a safe, large cap type, I make an original purchase in the neighborhood of $10,000 to $15,000. An example would be Canadian Nation Railway (TSX-CN). If I am buying a small cap I might start with $500 to $1,000. An example of this would be McCoy Corp (TSX-MCB). For a risky stock, I might start with 100 shares. An example might be Canadian Natural Resources (TSX-CNQ). (I think all energy stocks have higher than normal risk.)

I always make an initial purchase and if it works fine, I may buy more. However, sometimes I just purchase a stock to put away for a while to see what happens. I just purchased Barrick Gold Corp (TSX-ABX) for this purpose.

On my other blog I am today writing about Le Chateau Inc. (TSX-CTU.A, OTC-LCUAF)...continue...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.