borekfm[at]pacbell.net (Tad Borek) wrote in message news:<53a824b6.0308191717.27ee7bf4[at]posting.google.com> ...
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No. If you held more stocks, you would, ceterus paribus, have lower
volatility.

The point about 20 stocks was at what level would one diversify away
all the non-systematic risk in the portfolio. What I have seen is
papers that now show that portfolio needs to have 30-40 stocks to have
no non-diversifiable risk.

So maybe all stocks are a little more
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Yes the broader market indices have higher volatility than
historically. One reason may be lower transactions costs (aka more
day traders etc.) but another might simply be greater uncertainty. A
third reason might be the increase in options trading, especially
volatility trading, which should dampen such things, but might work
the other way. A fourth reason might be the rise of hedge funds which
short sell (again, should dampen the volatility, but might raise it in
practice).

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;-). The point I think still holds. a 15-stock portfolio is
underdiversified for most purposes.


Just to show how much theory and reality diverge, I think I read
somewhere that the average investor portfolio has 5 stocks.

darkness wrote
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If all or most stocks have become a bit more volatile, then it seems
it shouldn't have too much effect on the old 15-20 stock rules of
thumb. You just average out to a bigger volatility - as you would if
you held 500 or 1000 stocks. So maybe all stocks are a little more
volatile and consequently, so are the average and the broad market
volatilities (I'm not convinced this will stick for good, but it does
seem at the moment that the marginal traders have easier access than
before.)

I have read discussions of higher "dispersion," meaning variations in
performance/behavior from one security to the next, within an asset
class. That seems to be a greater problem for a stock-picker because
it increases the required sample size to achieve the average
asset-class return. My visual on this is throwing a net around two
schools of fish...in one, the average fish is 30 lbs, and most are 25
to 35 lbs. In the other, the average fish is also 30 lbs, but only
because of a half-dozen 300 pounders swimming with a bunch of 5-lbers.
If the goal is to average 30-lb fish in your catch, it's a lot easier
with the first school.

OK, not a perfect analogy, but drips - water - fish...all fits
together right?

-Tad

borekfm[at]pacbell.net (Tad Borek) wrote in message news:<53a824b6.0308181207.3bfdd882[at]posting.google.com> ...
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I had understood, (and I am afraid I don't have a reference to hand),
that individual stock volatility had risen quite substantially: to the
point where the old rule of thumb that 20 stocks provided adequate
diversification had been replaced by a recommendation that a portfolio
should have 40 stocks.

This is a much harder task for an individual investor to achieve.

The real reason DRIP works, I suspect, is human nature. It's much
easier to reinvest money that you do not have, than money which you
do. I remember seeing a graph which showed that 50% of your return
for holding stocks in the last 100 years came from dividends. The
other factor is that we all remember our, say, Coca-Cola or GE DRIPs,
but not our Enron DRIP (insert another dividend paying stock that went
down the tubes eg Penn Central or Continental Illinois).

The third reason, perhaps, is that a DRIP portfolio might be
value-tilted. If I own, say, Kimberley Clark shares which pay a 4%
yield, then I am going to DRIP a lot more of them than shares in some
tech stock. Since in the long run, value outperforms, I am exploiting
that (warning: value outperforms is an assertion about fully
diversified portfolios of stocks, not single stocks, so what I am
saying may be statistically meaningless).



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I am guessing that Allied Signal has not been a standout performer
over the last 20 years? Yet you would still have a sizeable
investment.

[MOD: ignore if duplicate, news server probs...]
Elizabeth Richardson wrote

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www.dripinvestor.com (free trial??)
www.netstockdirect.com

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Good/fun intro to stocks, but "basis tracking nightmare!" if used as a
primary mechanism for investing.

In addition to DRIP plans, many brokerage firms allow you to activate
div reinvestment on your portfolio, and almost without exception, I
don't - it just isn't worth it. Each stock spits out four dividends a
year, and under the brilliant new dividend tax legislation, it appears
that in theory you could have four potential basis adjustments per
year to the shares held prior to the dividend. Transfer agent reports
&/or 1099s might make this easier but still it's something to deal
with. Some online brokers may track this for you, but be sure to save
some printed records of each of those transactions in case the IRS
challenges your basis 23 years from now. And if you try to sell with a
limit order, well it's tough to unload 107.444 shares.

Basis is especially a problem if you have more than one DRIP stock,
which of course you will, because once you go from funds to individual
stocks it's essential that you diversify. If you go with 15+ stocks,
which is sort of the sweet spot for beginning to diversify a stock
portfolio, you've got 60 basis events per year. Yeesh! And that's just
to save on trading commissions, which aren't much at all these days,
and management fees, which can be so low as to be unnoticeable. DRIPs
were a lot more appealing when commissions were $100 and every mutual
fund nipped you for 1.5%.

I think every DRIP investor should give serious consideration to the
simple alternative of buying the S&P 500 (or some other broad-market
index) regularly, with DRIP for all the divs/cap gain distributions.
The risk is lower, you'll get a lot less mail, and basis tracking is
far easier. Plus if you want to sell 4% of your investment you won't
need to write a dozen letters to all your DRIP transfer agents.
Through Vanguard that will eat 0.18% per year, which I think is worth
the reduction in hassles.

Maybe though the point of the DRIPs you're looking at is to do
something different from the market...i.e., you want to add some risk
to the portfolio and go with 3 DRIPs in companies you feel good about
as investments. I think the issue there is that once you get into
stock-picking, there's the general principle that when you hold fewer
than ~15 stocks you're taking on unnecessary investment risk. In the
individual stock portfolios I've seen (including, and perhaps
especially, broker-advised accounts) this is the most common error
leading to poor performance. Virtually any stock has the potential to
drop say 20% or more in a matter of months, and 40% or more by next
year. But a group of 15 is much less likely to do so. No reason to
abandon this issue when you invest through DRIPs instead of through a
broker.

Also, when stock-picking, your buy & sell points become important, and
DRIPs don't lend themselves to this. You might think Company X is a
good investment now but the DRIP proposition is that Company X will be
a good investment now and every quarter going forward. Buffett is good
at picking companies for the long haul, but I don't know of many
people that are. Or at least, no better than if they bought the S&P
500 (or Wilshire 5000, or whatever) regularly, with dividends
reinvested.

Again though they're a good intro to stock ownership...in fact they
were my intro to stocks, I won 5 shares of Allied Signal in high
school from some contest, owned through the DRIP. You should see how
fat that file is today! I guess it's also a good example of how
expensive a DRIP plan can be from the company perspective...

-Tad