Weighting between smallcap and bigcap for diverse portfolio?

[johnfm]

So am designing a diverse portfolio of high yield big caps in diverse sectors (banking, oil&gas, mining,technology, pharma) and some smallcap 'up&comers' in those sectors'


I am not sure what weighting I should give to the big cap v small cap - I guess since the big cap is less likely to completely fail, I should allocate an amount I am comfortable with losing completely to the small cap oil, miners and tech.

I was thinking 85:15.

is there any financial theory I should be applying that will refine a weighting?

[anonymous-user]

I think it depends on your level of risk and if you are planning to actively manage the pot or buy and hold

You can find any number of theories of portfolio allocation to support any split you can think of

I would recommend having a look at some of the stuff written by Van Tharp if you want to get into this in a big way

Personally I could make a strong case for 85:15 as you propose but +/- 10 would be just as easy too

Of course you need to also think about the allocation at an individual holding (probably more important than the broad split really), if you have £10k and £8.5k is in large cap, is that 2 companies? 8? 16?

Also, what happens in the small cap portfolio if you pick a winner? So, you have £1.5k in, say, 3 shares and one of them trebles in a month, what do you do?

[Beardy10]

I would say the answer to this is dependent on your age as well as your risk appetite. Obviously if you are within 10 to 15 years of retirement I would recommend a large % of your portfolio if you are say in your early 30's I would say have a higher % of small cap's but spread across maybe as many shares.

I would be wary of targeting large cap stocks based purely on yield unless you think there is some that is really going to transform the business. Big dividend yields are generally the sign of a mature business that is struggling to grow either organically or through aquisition so they give the money back to shareholders....sometimes said shareholders get restless and put management under pressure to go out and do a deal (and don't forget most management teams get paid in stock options) to boost the share price. An extreme example is Lloyds....it yielded 7 or 8 % for many years and then when they saw their chance they made one of the worst aquisitions in living memory....same thing with RBS....stock price was in a slump and massively underperforming so they went out and bought ABN. The rest is history.

Big dividend yields can also be a sign that the stock market thinks the dividend will be cut.