The truth is, the secret to successful investing began over three thousand years ago at Ecclesiastes 11:1-2 with King Solomon telling us: “Ship your grain across the sea; after many days you may receive a return. Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” (NIV)
Simply put, King Solomon is telling us to diversify. Thousands of years later we call it asset allocation, but the principle is unchanging, don’t put all of your eggs in one basket. In a book entitled "The Solomon Portfolio" by Robert Katz, he discusses a brilliant study by Craig Israelsen, who is a professor at Brigham Young University. Dr Israelsen had decided to study various asset allocations, such as one asset portfolio (all cash), two assets (cash & bonds), three assets (cash, bonds & large cap US stocks), etc., all the way up to seven different asset classes.
He also studied traditional portfolio mixes such as 60% stocks & 40% bonds and 40% stocks & 60% bonds. He studied a total of ten possible portfolio combinations and then back tested each portfolio for the last 38 years. He did this to determine which portfolio would have produced the highest return on your investments with the lowest amount of risk.
These assets can be purchased through managed funds or an ETF (Exchange traded fund).
Joel Greenblatt (author of "The little book that still beats the market" & Professor at Columbia Business School) is one of the most successful investors of all time. During his 10-year management of Gotham Capital he returned an average 50% pa, this beats Warren Buffet and most other investors including Edward Thorpe, the pioneer of options investing who had an amazing return of 20% over a 28-year period.
Through his study and investing in financial markets, Joel Greenblatt discovered that the best return was owning 8 individual stocks. Not 7, not 9, but 8. Warren Buffett is famous for saying that you should not have too many stocks in your portfolio because it’s impossible to be able to completely understand each business and value them properly.
So, Joel Greenblatt with a track record of a 50% average annual return in the financial markets, says the ideal number of stocks to own is 8. What does King Solomon say in Ecclesiastes 11:1-2? Give portions to seven, yes to eight…. Now I’m not saying you should run out and buy 8 different stocks tomorrow as this is only recommended for people with education, knowledge and experience in value investing and using options.
Instead I would stick with the “Solomon Portfolio” which is highly diversified and for the record, Dr Israelsen’s research and back testing of the seven-asset allocation portfolio, yielded an annualised return of 11.16% over the 38-year period. This compares to the average annual return of the S&P 500 from 1956 through to 2019 which is roughly 8%.