Alas, my grey cells seize up when my friends ask me to pick my favourite stock because the idea of choosing just one seems like an act of hubris – or at least overconfidence. I prefer baskets of stocks selected using strategies with successful track records, which are usually less volatile than a single hot stock and often produce better results.
For instance, simple momentum portfolios with 10, 20 and 30 stocks provided average annual returns of 17.6 per cent, 18.4 per cent and 18 per cent, respectively, from the end of 1999 through to the end of April, 2023. The stock market, as represented by the S&P/TSX Composite Index, gained an average of 6.7 per cent annually over the same period. Momentum was a winning strategy.
Investors might be tempted to reduce costs by shrinking the number of stocks in the portfolio to five from 10 or even the single top performer over the prior 12 months. But concentrating an already volatile strategy can have disastrous consequences in downturns as shown in the accompanying graph.
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