We have spent the past few weeks looking at a number of plain-vanilla approaches to running self-managed super.
We have spent the past few weeks looking at a number of plain-vanilla approaches to running self-managed super. Last week we went off the grid with the ''one-stock portfolio'', the opposite of diversification. This week let's look at something else outside the square, something that I have written about before, something less blasphemous than investing in one stock. This approach is the ''boat fund''.
Financial theory spends a lot of time teaching us about diversification. Spreading our investments around to reduce risk. It is a gripping concept to think that you can add two stocks with a risk factor of one and come out with a combined risk not of two, but of less than one. Add more stocks and the risk falls away even further. It sounds clever and has become the self-managed super-fund mantra because it's sensible, and super funds are sensible, aren't they? But how far do you take it?
One major broker used to tell its massive retail client base that beyond 13 stocks the benefits of further diversification became pretty much irrelevant and for many years a lot of us adopted the rather arbitrary idea of 10 to 20 stocks.
But the truth is, when it comes to direct investment, choosing and buying individual stocks directly in the market (not through a managed fund, in other words), the portfolio size is dictated by whether you have a brain large enough to make more than 13 investment decisions at the same time, supervise with integrity more than 13 shareholdings at the same time, do the paperwork generated by 13 stocks and retain an interest in stock picking when your 13-stock diversification has realistically taken away the ability of a good stock pick to make much of a difference. In fact there comes a point when you would achieve the same result with even less risk by handing it all to a boring balanced-fund manager without you having to do anything at all.
Hardly gripping, and when it comes down to it, emulating a managed fund isn't particularly mesmeric. Once you diversify towards a market return, the intellectual engagement and upside potential fades. Where's the fun in the average, where's the thrill? No wonder people go off track and start to trade, punt and then gamble. It's more interesting, it has more upside and activity, more excitement, amusement and entertainment. Some of us aren't cut out to cruise, we want a roller-coaster. If only we could do that while retaining the benefits of diversification. While still reducing risk.
Cue the boat fund.
The boat fund concept came from the experience of a couple of traders. The story goes that a few years ago they both put $50,000 into what they called the boat fund and traded it up to $1 million, with which they bought a boat. True or not, it pioneered a whole new branch of investment theory.
We always think of diversifying our investments. But maybe we've got it all wrong. The boat fund teaches us something new. It's not the investments we need to diversify, it's the investors. Two brains are better than one, especially when they are both traders and have something to add. Twice the market presence, twice the network, twice the information, twice the number of opportunities, twice the ideas and half the risk.
Share your trading with someone of similar (or more) experience and you have a natural cap on irrational exuberance, impulsive action, unconsidered lashes: the Achilles heels of lone traders. When you have to persuade another brain to trade before you do, the idea has to have integrity. It is harder to lose your head and therefore your shirt when there are two of you. Two traders combined are less emotional, less prone to stupidity and more likely to trade with discipline. They are also more likely to take a bigger plunge when the story is good. Difficult for the ''Lone Chicken''.
The boat fund is a great concept. The diversification of investors, committed to each other by the mixture of assets, a recipe for success. All you have to do is find $50,000 and someone who isn't a Muppet that you want to share a boat with.
That narrows it down a bit.
Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au
His views do not necessarily reflect the views of Patersons.
Frequently Asked Questions about this Article…
What is a "boat fund" and how does the boat fund investment idea work?
A "boat fund" is an informal investment approach described in the article where two (or more) traders pool capital, trade together and share profits — famously the story says two traders put in $50,000 each, traded it up to $1 million and bought a boat. The core idea isn’t the boat itself but diversifying the investors rather than just the investments: two brains, two networks and twice the ideas working together on the same pool of assets.
How can a boat fund help reduce investment risk compared with investing alone?
According to the article, sharing trading with someone of similar experience can cut certain behavioural risks: having to persuade another person before acting limits impulsive trades, curbs irrational exuberance and brings discipline. The piece argues that two traders bring twice the market presence and information, and — in theory — can halve some behavioural risks compared with a lone trader.
Is the boat fund concept relevant to self-managed super funds (SMSFs)?
Yes — the article frames the boat fund as one of several plain-vanilla and off‑the‑grid approaches worth considering when running a self-managed super fund. It presents the boat fund as an alternative way to get engagement and potential upside while retaining diversification, but it also implies you need a compatible partner and shared governance to make it work in an SMSF context.
How many stocks should an SMSF or direct investor hold — is 13 really the magic number?
The article notes a commonly cited rule from a major broker that beyond about 13 stocks the diversification benefit becomes marginal, and many investors adopt an arbitrary 10–20 stock range. It stresses, however, that the practical portfolio size is dictated by how many individual investment decisions you can sensibly make, supervise and administratively manage — not a single magic number.
What are the downsides of over-diversifying a direct share portfolio?
The article points out that once you diversify towards a market return you may lose intellectual engagement and much of the upside from stock‑picking. Too many holdings can dilute the impact of a good pick, create extra paperwork, and in some cases mean you'd get similar results (with less effort) by using a boring balanced manager instead.
How does trading with a partner change trading behaviour compared with a "lone chicken" approach?
Trading with a partner introduces a built‑in check on impulsive behaviour: you must persuade another person before acting, which raises the bar for trade integrity. The article says paired traders tend to be less emotional, more disciplined and less prone to stupid mistakes — while also being willing to take bigger, well‑considered positions when the opportunity is strong.
What was the "one-stock portfolio" mentioned in the article and how is it different from a boat fund?
The "one‑stock portfolio" was described as last week’s off‑the‑grid extreme — essentially the opposite of diversification, concentrating a portfolio into a single stock. By contrast, the boat fund keeps diversification of assets but changes the diversification focus onto investors: multiple traders sharing one pot rather than putting everything into one company.
Who wrote the article and where can I read more about these investment ideas?
The article was written by Marcus Padley, a stockbroker with Patersons Securities and the author of the newsletter Marcus Today. The piece notes you can try Marcus Today for free at marcustoday.com.au, and it also says his views do not necessarily reflect those of Patersons.
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