The 2009 World Wealth Report from Capgemini and Merrill Lynch, a survey of high net wealth investors around the world that have US$1 million of net financial wealth excluding their primary residence, outlines where these people invest their money.
On average, the 10 million people globally that fit this definition of having ‘high net wealth’, have 29% of their capital invested in shares, 31% in bonds, 17% in cash, 18% in real estate and 6% in alternatives like hedge funds, commodities and private equity. If the world’s richest people take such a diversified approach perhaps the rest of us should also consider it.
Diversification also applies to share portfolios. Own a range of companies, but do not over-diversify, or as Peter Lynch the great Fidelity fund manager, calls it "de-worse-ification". Having said that Lynch used to hold upwards of 700 companies in his fund, but recommends personal investors hold perhaps 20-40 companies.
Emphasising high-quality shares is a strategy that continues to make sense. It is very common to see people new to shares to head straight for the speculative end of the market – to buy small companies or shares trading at a few cents.
While not as exotic as this, high-quality companies, like larger, blue chip companies that have experienced management and have a track record of delivering growing profits and dividends, do tend to outperform long shots.
When times are good and the market is rising, quality does tend to lag, but when the inevitable tough times roll around, quality shines and long shots can often fall into deep black holes.
Selling is something investors should be willing to do, but only reluctantly. Warren Buffett has often said his preferred holding period for shares is "forever". What this really means is that long-term investors should sit through periods of short-term share price weakness or volatility if they are comfortable with the underlying fundamentals of the business they own.
However, this doesn’t mean share investors can ignore bad news. If a company appears to be facing difficult long-term issues, be prepared to sell.
Include some smaller companies. While blue chips should make up the core of a share portfolio, leave a bit of room for some interesting small companies. Although higher-risk, they offer more growth potential. It can be wise to look for smaller companies which have the characteristics of blue chips in every way other than size.
Buy integrity. As renowned US investor Philip Fisher has said "there are too many choices out there to bother with companies that aren’t run by honest, diligent folks".
