Thread by @JonahLupton

We’re living in the golden age of stock investing for several reasons:

1) There’s so much data & information available compared to 5-10 years ago

2) There’s an incredible number of innovative, disruptive companies to invest in

3) $0 commissions on most platforms

4)FinTwit

In my opinion If you’re looking to generate extraordinary returns you need to have a concentrated portfolio of stocks and sector/thematic ETFs.

This can be 15-35 holdings but after that you’re doing yourself a disservice.

Nobody ever talks about the negative impact that over-diversification can have on your portfolio returns.

10+ years ago when I was still managing capital for HNW clients and institutions we were simply trying to beat the indexes by 2-3% per year after fees.

Running a concentrated portfolio at the big wealth management firms like Morgan Stanley and Merrill Lynch is frowned upon.

So instead this is how most wealth managers and financial advisers manage money...

They spent a hour or two getting to know you so they can better understand your short/long term investment goals & objectives, your time horizon, your risk tolerance, your income needs, etc

Then they’ll put together a plan that includes investment management, retirement planning, insurance, tax planning, estate planning and so forth.

With regards to the investment management portion they will build you an asset allocation model similar to the following:

20% large cap growth
20% large cap value
10% small/mid cap growth
10% small/mid cap value
10% international
5% emerging markets
10% corporate bonds
10% government bonds
5% high yield bonds

With that asset allocation strategy you are certainly diversified but TOO DIVERSIFIED in my opinion.

Each of those 9 funds or money managers is going to own 30-100 stocks/positions which means you end up with 300-500 holdings.

Some wealth/financial advisors use ETFs, some use mutual funds and some use SMAs (separately managers accounts) but the result is the same. You’ll never outperform the indexes in a meaningful way with this many holdings.

I have nothing against wealth/financial advisors b/c they play a very important role for millions of people that don’t have the time, desire or expertise to manage their own portfolio.

I’m just trying to bring some transparency to the industry which I never see anyone talking about.

I get messages and emails all the time from wealth advisors at different firms and I just laugh because if they had been managing my money this year I’d probably be up 10-15% instead of 225-250%.

Maybe it’s because I’m super competitive and never satisfied but the idea of only beating the indexes by 2-3% and calling that a successful year just drives me crazy so I felt the need to share my thoughts.

I’m definitely not saying that everyone should be managing their own portfolio because some people are simply horrible at it and sell every time their stocks go down 5% but anyone using a wealth/financial advisor should understand the downside of over-diversification.

SMA = separately managed accounts

This means you own the individual stocks or bonds in your account so it’s better for tax loss harvesting strategies.

In comparison mutual funds are not tax efficient investment vehicles.