How to Construct a Foolish Portfolio Morgan Housel, Andy Cross, & Megan Brinsfield Megan Brinsfieldis the Director of Financial Planning for Motley Fool Wealth Management, LLC (“MFWM”), an affiliate of The Motley Fool, LLC, and an investment adviser registered with the U.S. Securities and Exchange Commission. The views expressed herein are those of Ms. Brinsfieldand do not necessarily reflect the views of MFWM or any of its affiliates. These comments may not be relied upon as recommendations, financial or investment advice or an indication of trading intent. A Foolish Portfolio How many stocks should you own? 1. Enough to prevent a few losers from ravaging your wealth. 2. Few enough so your returns don't just mimic an index fund. Dow Jones Industrial Average (30 stocks) S&P 500 (500 stocks) 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 • Studied the returns of 4,700 mutual funds. • Over a 10-year period, about 80% underperformed an index fund. • But the average fund owned 140 stocks. • The average fund’s 10 largest holdings – representative of its best ideas – do, on average, beat the market. • Most funds are spread far too thin to have a shot at beating the market. “Owning between 12 and 18 stocks captures about 90% of the diversification of owning the entire stock market.” Investment Analysis and Portfolio Management, Keith Brown and Frank Reilly Percentage of stocks that lost money, 1980-2014 Percentage of stocks that trailed the index average, 1980-2014 14% Utilities 85% 54% Telecom 68% 53% Technology 71% 30% Financials 58% 42% Health care 60% 37% Industrials 64% 34% Materials 66% 48% Energy 72% Consumer 26% 51% staples Consumer 44% 65% discretionary Recommend investors own 10-30 stocks Personally owned 100 stocks One stock, Geico, increased 200-fold Made up most of his portfolio Accounts for all his long-term outperformance Owned 400-500 stocks over his lifetime Made most of his money on 10 of them “If you remove just a few of Berkshire's top investments, its long-term track record is pretty average.” A Foolish Portfolio This is a complicated topic that incorporates personal emotions and risk tolerance. It is not as scientific as people want it to be. Be careful owning fewer than 15 or more than 50 stocks. Should spread across at least five major industries. In a new portfolio, 30 stocks in equal weights can be a great rule of thumb. A Foolish Portfolio What say you, Andy?