Fill your portfolio with your very best ideas

Fund managers’ top picks beat the market, but the rest of their portfolios often add little value, says Chris Sholto Heaton.

Dogs
The top dogs convincingly beat the rest

It’s widely accepted that your portfolio should be well-diversified to prevent a single disastrous decision from wiping out a large chunk of your wealth. At the same time, if a portfolio is too large, your chances of outperforming the market shrink and you might as well hold a cheap tracker fund.

These extremes are self-evident: the big question is the number of holdings that gives you the best trade-off between return and risk. Research by Miguel Antón of the University of Madrid, Randolph Cohen of Harvard Business School, and Christopher Polk of the London School of Economics gives us an interesting way to think about this. Their paper Best Ideas looks at how many of a fund manager’s highest-conviction stocks make a contribution to beating the market.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.