Most investors aim to build a balanced portfolio, to spread their risks. Yet it is all too easy to lose your balance, especially if you have large sums in passive trackers and active funds focused on the FTSE 100. The danger is you might suddenly see your portfolio falling off a cliff.
Get the balance right
The FTSE 100 is heavily weighted to just a tiny proportion of stocks. The four largest constituents comprise more than a quarter of its total market capitalisation, with a weighting of 27.56%. HSBC Holdings (LSE: HSBA) makes up a whopping 7.55% of the index on its own. The bank has performed well lately, rising 43% in the past 12 months, but that isn’t the point.
If you have a fat chunk on your portfolio sitting in a FTSE 100 tracker, as well as holding direct shares in the bank, you may have too much exposure to one company’s fortunes, and could suffer disproportionately if it slips. I happen to be a long-term fan of the stock, having tipped it ahead of its recent recovery, but you don’t want to overdo it.
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Really sure of Shell?
Oil giant Royal Dutch Shell (LSE: RDSB) makes up 9.9% of the index, if you include both its A and B shares, as my FTSE factsheet does. Again, it has recovered strongly lately, rising 36% in the past 12 months, amid signs of oil price stabilisation. However, you need to understand exactly how much you hold in this stock, and the oil and gas sector generally, through direct equities, trackers and managed funds. Most investors will not want to put more than 5% of their portfolio in any individual company, you could easily end up with two or three times that amount.
Your oil and gas sector exposure will be even greater if you also hold shares in BP (LSE: BP), which has a 5.03% FTSE 100 weighting. BP has had a good year, but it’s return of 33% is very similar to Shell’s number, because both have been driven by the same factor: oil price sentiment. If recent OPEC and non-OPEC production cuts prove a sham, US wildcat shale drillers plug the shortfall 0r the global economy slows, you could find a hefty chunk of your portfolio falling in lockstep. The FTSE 100 has a 12.65% weighting to oil and gas, the biggest on the index (banks come second at 11.2%). Beware doubling down on what is already meaty exposure.
Put that in you pipe
At least FTSE 100 giant British American Tobacco (LSE: BATS), the third biggest stock on the FTSE 100 with a 5.09% weighting, gives you diversification into tobacco. Like the other three stocks listed here, the company has had a good year, rising almost 29%. This is one of the most stable stocks on the index, its 10-year performance graph smooths out the bumps to show a steady upwards climb. Its dividend growth rate is equally impressive.
There is a strong investment case to be made for all four of these stocks, but you have to know what you are getting into. If you have large sums sitting in a FTSE 100 tracker, you are making an outsized bet on just three sectors and four massive companies. Is this what you really want to do?
