Building the portfolio: the founding principles
A well-built stock portfolio rests on three structuring decisions, taken in order:
- Asset allocation: what share goes to equities, bonds, cash? This is the most important decision — it explains 90% of long-term performance variance according to academic studies (Brinson, Hood, Beebower, 1986).
- Stock selection: within the equity sleeve, which companies? This is where fundamental analysis and screeners add value.
- Timing: when to buy and sell? This is the decision that consumes the most energy and adds the least value. Research shows that systematic market timing destroys performance net of fees.
Practical rule: devote 80% of your energy to stock selection, 15% to allocation, 5% to timing. That is the opposite of what most beginner investors do.
Number of positions: finding the optimum
Diversification eliminates idiosyncratic risk (specific to each stock) but cannot eliminate systematic risk (linked to the market). Here is how the number of positions affects risk reduction:
| No. of positions | Residual risk vs 1 position | Comment |
|---|---|---|
| 1 | 100% | Maximum risk — one profit warning and the portfolio collapses |
| 5 | ~55% | Still very concentrated |
| 10 | ~35% | Minimum viable for individual stocks |
| 15 | ~28% | Sweet spot for an active investor |
| 25 | ~22% | Good diversification. Heavier to manage. |
| 50+ | ~20% | Returns close to an ETF — you may as well use an ETF |
For an active small-cap portfolio, 10 to 15 positions is the comfort zone. Each new position must be analysed with the same rigour as the first ones — otherwise diversification turns into mere scattering.
Measuring performance correctly
Most private investors calculate their performance incorrectly. They compare the current value with the initial value without accounting for deposits and withdrawals along the way. The correct method is the TWR (Time-Weighted Return).
Rebalancing: when and how
Rebalancing means bringing positions that have risen too far (and therefore grown too large as a percentage of the portfolio) back to their target weight. There are two approaches:
- Calendar rebalancing: once a year or every six months. Simple, low fees, no over-optimisation.
- Threshold rebalancing: triggered when a position exceeds 20-25% of the portfolio. More responsive, avoids excessive concentration.
Mind the tax impact: every disposal realises a taxable capital gain (in France, a 30% flat tax outside the PEA). Inside a PEA or PEA-PME tax wrapper, rebalancing is tax-neutral — a major advantage of those accounts. Check the equivalent tax wrappers available in your own country.
The 5 behavioural mistakes that destroy performance
| Mistake | Mechanism | Solution |
|---|---|---|
| Panic selling | -20% corrections trigger irrational fear and lead to selling at the bottom. | Set your tolerance level before investing. Don't look at the portfolio every day. |
| Cutting winners too early | A tendency to take profits quickly and hold on to losers (the disposition effect). | Let winners run as long as the fundamentals justify it. |
| Overweighting the home bias | Investing mainly in domestic companies because they feel "familiar". | Diversify geographically, even for a small-cap portfolio (across Europe). |
| Overtrading | Too many transactions, often driven by boredom or excitement. Fees pile up. | Give yourself a 48-72h cooling-off period before any decision. |
| Ignoring the benchmark | Being satisfied with a positive return without comparing it to the market. | Systematically compare against a small-cap index (small caps) or a broad market index. |
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