# Limitations of the 'buy the top 10 shares' strategy



## rainyday (31 Dec 2001)

I'd be interested in views from Brendan/others on any possible limitations of the recommended strategy of buying the top ten shares. Does this strategy hold true for the new lotto winner with £1m to spend, or for the dot-com millionaire with £10m to spend etc etc. Is there a top-end limit where this strategy is no longer valid and one should seek professional advisors?

Regards - RainyDay


----------



## Brendan Burgess (3 Jan 2002)

Hi Rainyday

This has been brought up a few times, so I am going to write out a comprehensive reply covering "Is 10 enough?" "Is Ireland enough?" etc.

Brendan


----------



## rainyday (3 Jan 2002)

Looking forward to seeing it - Note that my query was not just about which shares to invest it - I was really thinking that if I had a €10m fortune, should I continue to invest it directly in shares or should I be building office blocks or staring .com companies or etc etc etc


----------



## Brendan Burgess (4 Feb 2002)

Hi Rainyday 

Sorry about the delay in replying. I did draft a reply but I was not happy with it and then I got drawn into other debates. 

I think it is important to look at your entire financial position before deciding your investment strategy. 

Let's start with an unemployed person living on social welfare who has just won €1m. That is their only asset. They have no house, no investments and their wage earning potential is very low. They will be relying on that €1m for the rest of their life. 

I would advise that person to buy a house and to invest the remainder in a portfolio of shares. 

Is 10 shares enough? Yes, I think it is. It might appear that 20 shares is less risky than investing in 10 shares. But, in reality, it's not. Investing in one share is obviously very risky. Investing in two shares reduces the risk significantly. But each extra share has less incremental reduction in risk. The difference between 10 and 11 shares in insignificant. You can argue that there is no extra cost in investing in 20 shares, so you should do so if you have such a large amount of money. Personally, I just don't think the infinitesimal reduction in risk is worth the extra administration involved. 

Should this person invest in property as well as equities? I really don't think so. The long term returns from equities have always outperformed property and will probably do so again. Investing in property requires skill and knowledge and if you don't have this, it's risky. You could invest in a property fund, but then you are paying high charges for this diversification. Again, I just don't think it is worth it. 

Now what about a dot.com millionaire with €10m?  The exact same criteria apply. In other words, to be sure to remain wealthy for the rest of their life, they can invest their cash in 10 different shares. I don't see any real difference between €1m and €10m. I think that the investment strategy should be the same.

However, a person with €10m can take risk with their money. A 50% loss still leaves you with €5m.  Some wealthy people will try to achieve other objectives with their money. For example, they will try to get involved in a business again and may invest part or all of it in that business. They may buy property because they enjoy managing properties. These strategies are perfectly acceptable because they give the person something to do which they enjoy doing. But they don't need to do this if their sole financial objective is to preserve and grow their wealth.

Now what about the ordinary man in the street? Say a 40 year old with a house, a pension fund and a fairly reliable salary. Let's say that they have paid off their mortgage and have €1000 to invest. They should look at their overall financial picture. They are already well diversified, so investing the €1000  in just one share is ok.  The consequences of the risk are not catastrophic. If they buy just one share and it declines in value by 100%, it's not the end of the World. They still have their home, their pension fund and their salary. They will not like losing their entire investment, but it represents less than 1% of their entire wealth. 

Do any of these three people need a financial advisor? Not if they are prepared to read Askaboutmoney. Most people are not prepared to read Askaboutmoney, so they will pay a huge fee to an advisor who may be incompetent or dishonest. The great thing about Askaboutmoney is that it discusses all the options and represents a wide variety of opinions. If you go to a competent and honest advisor, he may well be wrong and his advice will not be challenged. 

Brendan


----------

