<FOOLISH WORKSHOP>

Owning More Than a Few Stocks      

by Jim Stevens ([email protected])

Burlington, VT (March 15, 1999) -- How many stocks should you hold in your portfolio? If one peruses the Workshop Screen Explanations, one thing that is fairly noticeable is the impressive backtests of stock screens holding just five stocks at a time.

Over long periods, most (if not all) of the backtests with five stock versions of the screens show that holding the fewer number of stocks -- five vs. ten -- produces superior returns. Simple then: sell the farm, mortgage the house, put it all in the Keystone 5. right?

For some with iron stomachs, that may be possible. Over time, it may indeed even be the more profitable track. Having your entire nest egg in just five stocks, however, is just too much like a ride on a roller coaster for some of us to take, though.

The recent market action in two stocks that have been ranked high in many Workshop models got me to thinking about how bumpy the ride can get when you own just a few stocks.

Last Friday, Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> was taken out and shot, down more than eight points on the day. Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, after disclosing that its profits would only meet expectations a little more then a month ago, was beaten down and left to languish.

Now, unlike some of the medium-sized companies that get picked up on the radar of some of the Workshop screens only to be crushed into oblivion, we don't hear anyone declaring these companies near dead. What we probably have here is a shift in emotion about these companies in the short term, but probably nothing that should affect anyone with a longer investment time horizon. Some would even argue that backslides like this create great entry points for these big growth stocks.

So what if you had these two biggies in a portfolio of just five stocks? Well, the last month and a half would not have been full of good sleeping nights. From their highs on February 2, 1999 through Friday's close, Oracle is down 30.6% and Dell is off 23.3%. Averaged, that's about a 27% loss. Over the same period, the Standard & Poor's 500 Index is up 1.65% and the Nasdaq Composite Index is down just 5%.

If you sold Oracle or Dell because of recent performance it would probably be at your peril. But those are the kind of emotions that become strongest when short-term market emotion takes hold. If you were unlucky enough to start a 5-stock investment portfolio in the beginning of February, these emotions may be very damaging to your psyche! The Foolish thing to do is to hold more companies or, if you're just starting out, at least have a goal of expanding to 20 stocks eventually.

By holding twenty companies, an investor limits the effect one stock can have on the value of the portfolio. If one company dropped a precipitous 50%, the whole portfolio would only be drawn down 2.5%; a drop much easier to sleep with. Although the sword cuts both ways -- big gains in single companies are diluted as well -- I think it's a great way to keep your investment vessel on an even keel.

Have a great week!
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