Ideal Portfolio Allocation

This is something I struggle with a lot, the world is too dynamic to simulate it using linear assumptions. But I still have to do something to guide how I should go with my portfolio allocation.

For example, you have $500k for investing in your portfolio and your desired goal is to double using the existing companies you like to invest in.

Let’s just assume that only 1 stock in your portfolio that actually moves up, and others are flat or constant.

Portfolio 1 Allocation $ (‘000)
Stock A 30% 150
Stock B 30% 150
Stock C 15% 75
Stock D 15% 75
Stock E 10% 50

Only 1 stock moves up and you have such high conviction about that stock so you put the most of your money into it, so assume it is Stock A.

When stock A doubles, 150k x 2 = 300k. Portfolio gains = 30%
When stock A triples, 150k x 3 = 450k. Portfolio gains = 60%
When stock A quadruples, 150k x 4 = 600k. Portfolio gains = 90%
When stock A quintuples, 150k x 5 = 750k. Portfolio gains = 120%

Therefore you need stock A to gain about 4 to 5 times to double your entire portfolio assuming all the others are flat.

What if you had a different portfolio?

Portfolio 2 Allocation $ (‘000)
Stock A 20% 100
Stock B 20% 100
Stock C 20% 100
Stock D 20% 100
Stock E 20% 100

Likewise, only 1 stock moves up, and now they all have equal allocation, let ‘s just assume stock A is the one moving up.

When stock A doubles, 100k x 2 = 200k. Portfolio gains = 20%
When stock A triples, 100k x 3 = 300k. Portfolio gains = 40%
When stock A quadruples, 100k x 4 = 400k. Portfolio gains = 60%
When stock A quintuples, 100k x 5 = 500k. Portfolio gains = 80%
When stock A sextuples, 100k x 6 = 600. Portfolio gains = 100%

This is actually quite a dramatic difference, you need it to go up 6 times before it will double your entire portfolio.

 Stock A Allocation 30% Allocation 20% Difference
Double Portfolio Growth 30% 20% 10%
Triple 60% 40% 20%
Quadruple 90% 60% 30%
quintuple 120% 80% 40%
Sextuple 150% 100% 50%

The difference is so huge when stock A gets higher. Nothing is linear is this real world therefore the able will get further and further away from the less able. The world works in a way that rewards the smart, hard-working, and lucky while leaving the ones with little nothing at all.

Now how do I actually commit at least 30% of my capital into just 1 company? You surely require immense understanding of the company and the industry. You somehow need to be so thorough with the company that you treat it as one of your own companies. Further research is the only way to reduce risk, not through diversification. Diversification to reduce risks is for the lazy-minded who is not willing to put in the extra efforts into getting a complete understanding of the company they are investing into. When you have so much confidence and conviction about this high quality company, you will eventually think 30% is too little. However, for the sake of unforeseen circumstances, I suggest 35% is the maximum allocation to any single company before they have risen in your portfolio.


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