Lootman wrote:
If there is a central reference library near you that has old copies of the FT, take a look at the share price pages from 30/40 years ago and notice how much has changed since then. Back then you would probably have bought Hanson, ICI, Coats Viyella, Cadburys, Marconi, GEC, Wellcome, Lucas and other names that have long gone. You will see no utilities or privatised entities, nor many tech or service names that are familiar to you now.
True but that doesn't mean money invested in those companies and left alone would now be worthless. Far from it when you consider, for example, the value of AZN which contains the Zeneca from ICI. Or the present value of those old Wellcome or Cadbury shares.
And that unbalanced portfolio - is that a concern? Imagine you had bought Apple 20 years ago and another 9 shares. At this point Apple is probably well over 90% of that portfolio, maybe 99%. Would you have chosen that kind of distorted weighting at the outset? If not, why is it OK now?
Imagine you had bought Apple 20 years ago then sold it after it doubled or trebled in value so as to rebalance your portfolio. How would you feel now?
My impression from what I've read, and from talking to the few wealthy people I know, is that serious wealth is most usually built by LTBH. If you are forever worried about risk reduction and balance then you will probably do well enough but if you want to shoot for more than that then LTBH is a better bet IMO. So depends on your priorities.
In fact, the whole principle behind LTBH is that you're clever enough to know what to buy and in what amounts, but you are somehow totally useless at selling. Can both be true at the same time?
There's nothing particularly clever about buying a basket of equities, selected from different sectors, in equal amounts. Equal precisely because you don't know which will do well.
And what about risk? If your portfolio ends up being heavily weighted in just a couple of names, how do you assess the extra risk that you are taking?
Risk of what? There is an assumption in your argument that this remains unchanged even if your portfolio grows. But this is unlikely to be the case, at least from the perspective of the investor. If I have £10m then my attitude to risk may be very different from when I had, say, £100,000. Losing half of a net wealth of £100,000 is far more likely to have a material affect on my quality of life than losing half of £10m.
I choose my initial investment portfolio on my attitude to risk for the capital amount that I'm investing. I may well be happy to have a much higher % invested in one share if my total wealth is much higher, especially if my wealth in the other shares is also much higher than my starting capital. So, in your Apple example, I may be OK with £9m in that company if I have £1m in others and started with £100k.
Context is important.
BofE