Concentrating on your very best investment ideas might seem like a good thing, especially if you know the ins and outs of the business you’re looking at. That said, skipping the “diversification” step comes with more than its share of risks, especially if you were wrong about a company, its growth trajectory, or your valuation isn’t quite in the right spot. Undoubtedly, perhaps one variable in your discounted cash flow (DCA) model was off, leading to a margin of safety that wasn’t as wide as you originally thought.
In any case, the right number of stocks in a Tax-Free Savings Account (TFSA) portfolio is going to differ for everybody. For some, the sweet spot is 20 names. For others, less than 10 will do. And for those who aren’t afraid to put in the extra homework, more than 40 holdings could still make sense.
Personally, I think an index exchange-traded fund could help you cover many of the bases you may be missing. And, beyond that, I think it’s good to have a handful of names that you believe in. While “di-worsification” can become a problem for a bloated portfolio, I think there’s less harm in overdiversification than underdiversification, at least for most retail investors who would rather have a backup plan than allocate too much in such a few firms.
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Berkshire Hathaway: A single stock that provides ample diversification
If I could only buy and hold one stock, though, it’d have to be Berkshire Hathaway (NYSE: BRK.B). After Warren Buffett, the Oracle of Omaha, retired at the start of the year, the new CEO is Greg Abel, who just so happens to be from Alberta. While the man isn’t as legendary as Buffett, he is a hand-picked industry veteran who can get the job done well. With Berkshire, you’re already getting quite a bit of diversification, with insurance, railroads, retail, energy, and many other businesses that make for an interesting lower-tech alternative to the S&P 500 or TSX Index.
What’s most convenient about Berkshire is that it doesn’t pay a dividend, which makes it a great pick for a TFSA or a non-registered account (especially if you tend to reinvest dividends anyway). Indeed, it’s better to let Berkshire reinvest what it would have otherwise paid to shareholders.
Perhaps the best thing about owning shares of Berkshire as a Canadian is that the lack of a dividend means no 15% dividend withholding tax, which can especially hit hard in a TFSA if you’re holding a higher-yielding U.S. name.
Bottom line
In any case, it’s a jittery time for Berkshire Hathaway shareholders (shares are down around 8%), especially as Abel (did I mention he’s Canadian?) readies to write his first annual letter as the conglomerate’s top boss (it’s due at the end of the month).
While time will tell how Berkshire runs under its new top boss, I think that it’s mostly going to be business as usual. What’s most exciting is what kind of acquisitions and investments the firm will make first now that it’s Abel, rather than Buffett, who must give the final approval.
