Managing a portfolio of 500+ stocks - The Process

Dear all,

How do you manage a portfolio of 500+ stocks?

I think this question came out quite often during my conversation with many people out there and also comments on my blog postings. Therefore, I have decided to write this blog entry to response to some of the queries out there.

Previously as a Test Development Engineer, I was required to run more than 3000+ regression test cases for my product across various platforms. Nobody asked me how I managed to do so and I was surprised that many people felt that having 500+ stocks is one too many. Imagine running 3000+ test cases!

I had actually posted some of the commonly asked questions on my portfolio in this blog entry entitled - "Questions, Questions, Questions......" a few years ago. For those readers who might miss out the last time round, you can refer to the link below for reference:
http://ghchua.blogspot.sg/2007/02/questions-questions-questions.html

Of course, there had been a slight change in my strategy since 2007. Previously, I just diversified across a whole basket of stocks and let the market decide which are the ones that would appear as my top holdings. Since I turned full-time, I have adopted a slightly different strategy of overweighting my better ideas.

There is no secret in managing a portfolio of 500+ stocks. Just like running 3000+ test cases, you need to have a process in place. One of the most important concept to me is partitioning. Partition means breaking up your stocks into categories. Another word for this is called grouping. Basically, as an example, I partitioned my stocks into 3 major categories:

1. One group which require close monitoring
2. One group which you can monitor once in a while
3. One group which you do not need to monitor at all.

So, there you have it! Your stocks are now fall in place in one of these categories. Basically, you can ignore stocks in 3. as these are mostly ones that are insignificant in terms of weightage of your portfolio as they are "bombed out" stocks. Stocks in 2. have potential but you really do not need to look at them at all times as they are mostly in the middle part of your portfolio, whereby it is not so significant. Your core holdings in 1. which you need to look closely at, and most possibly need to add onto them every now and then.

You can of course have your own grouping methodology and you do not need to follow my example. What I want to show here in the above example is that having a process in place is more important than the number of stocks in your portfolio. Because if you have a process and you manage your portfolio based on your process as a guideline, everything will fall in place nicely and you won't get off-track easily even if you have a list of 500+ stocks.

In my previous life as a Test Development Engineer, I focused mainly on those problematic test cases that always fail on the first run. If you have a portfolio of 500+ stocks, you should focus on those that matters most to you in terms of portfolio weightage.