Suppose you have decided to put 80% of your money into shares, and have identified 4 shares you like. Should you put an equal amount into each one, i.e. 20% of your total funds? Or should you put, say, 50% into the one you like most, and only 10% into each of the others?
There are two theories about balancing or 'weighting' your portfolio, as this exercise is called.
The first is summed up by Jim Slater:
"The percentages should be weighted towards those shares which provide the investor with the greatest degree of comfort."
In other words, buy more of what looks best to you.
This is clearly an ideal strategy if things work out as you expect. By placing bigger bets on your favourites, you make proportionately bigger gains if they perform as predicted.
The problem is that the unexpected happens all the time, as money manager Peter Lynch found when he used to run the world's most successful fund:
"The stocks in which Lynch has made large amounts of money have often been surprises. When, on the contrary, his initial reaction to a story was 'Wow', he has often lost money. Rarely do things turn out as favourably as hoped."
Source: The New Money Masters, .
This suggests an alternative approach to balancing - distribute your cash evenly. Then you may be less likely to suffer big losses when your 'sure things' fail. You may also avoid the disappointment of having put too little money into your surprise winners.
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