An investment manager named Mariusz Skonieczny wrote a post for Seeking Alpha that was very skeptical about the practice of diversification and the motivations behind it. Throughout the post, portfolios with 100 holdings drew his ire but I did not glean what number he thinks is right.
He believes that diversification hides incompetence and does not give an opportunity for meaningful outperformance. Although I do believe in diversification I cannot say Skonieczny's arguments are off base. He talks a lot about reps at brokerage firms whose job it is to sell, not analyze, stocks, which is a point I have made before. He notes that by diversifying you avoid the consequence that a blown up stock can have on a portfolio, which I view as a good thing.
The building block here is that a proper savings rate, suitable asset allocation and a normal equity market return should give people a decent shot at having enough money for when they retire. A realistic understanding of one's means doesn't hurt either.
It is this idea that forms the foundation of how I navigate cycles. I try to go along for the ride during up-a-lot, up-a-little and down-a-little, and try to avoid the full brunt of down-a-lot by taking defensive action when the SPX is below its 200 DMA, as it is now. To repeat from above, this should give people a decent chance of having enough money when they need it, again assuming reasonable spending habits.
A variable that we are collectively trying to assess is "normal" equity returns. The last decade has not been normal. Actually, maybe it has been normal. I would not say I am totally on board with the 18-year cycle concept but there is something to it. Stocks did poorly for a long time in the Great Depression into the 1940s, did very well until about 1968, did badly until 1982, did great until 2000 and then the last ten years. If there is any meat on this bone then we would be in the neighborhood of about halfway through the cycle.
That there could be eight more years of sideways trading probably tells you one of two things. On the positive side (the way I choose to look at it) you can commit to yourself to save like hell so that when equity markets (global or domestic) start some sort of up cycle you will have a lot of powder that you can deploy. The negative side is that a do nothing market means your portfolio will probably not do anything.
I am more comfortable articulating this as saying long round trips to nowhere have happened before and then they end and are followed by up markets. We have no control over when this will happen so I prefer not to worry about it and just go along for the ride during up-a-lot, up-a-little and down-a-little and try to avoid the full brunt of down-a-lot by taking defensive action when the SPX is below its 200 DMA as it is now (repeated for emphasis) because this is more in my control.
If going along for the ride combined with proper asset allocation and the rest is enough to get the job done for many people then adding value can come in the form of simple enhancement of returns (aka smoothing out the ride) and not necessarily making a killing and taking the risks needed to make a killing.
It is not that a 12-stock portfolio (or however many names Skonieczny owns) is wrong, the correct way to frame it is what is right for you. For me the ideal number is 35-40 holdings. For some folks it will be more and some it will be less. And, yes, I personally am very motivated to try to avoid portfolio action that causes clients to react emotionally.
