The American Association of Individual Investors (AAII) wrote an article citing that “holding a single stock rather than a perfectly diversified portfolio increases annual volatility by roughly 30%…Thus, the single-stock investor will experience annual returns that average a whopping 35% above or below the market – with some years closer to the market and some years further from the market.”
The AAII study went on to state that, as a rule of thumb, diversifiable (i.e. company-specific) risk will be reduced by the following amounts:
Holding 25 stocks reduces diversifiable risk by about 80%
Holding 100 stocks reduces diversifiable risk by about 90%
Holding 400 stocks reduces diversifiable risk by about 95%
The number is important for diversification, but more important is the correlation for market risk.
You could have 10 stocks that move together almost perfectly (e.g. Tech) and could have 10 stocks from different sectors, from different countries, denominated in different currencies.
Most academic/theoretical studies are a bit limited, as most of them are about US stocks only (other studies should be done about investing in other non-US countries or investing in a mix of countries) and most important is that diversification mitigates other risks besides market risk, such as, default risk, business risk, operational risk, IT risk, reputational risk, political risk, legal risk, etc, that individually companies could face.
Diversification is a risk management strategy not only for market risk.
Summary:
I follow 2 lists of stocks that I use as source / building blocks for my Big portfolio.
1- The Morningstar Wide Moat Focus Index ( Morningstar give me a list I can read about )
2- Dividend aristocrats. ( There are 65 Dividend-Paying Stocks )
I have reduced mine significantly over last 6 months or so, 16 stocks and 2 ETFs. This way I can keep track of all earnings and updates and properly cover them. I am heavily concentrated through in some stocks/industries/geographies.
I have 200 stocks and etfs. I use a long-term trend following strategy, and I only close positions with -30%, favourable takeovers and extreme short term rallies.
I Have 65 in my portfolio
I keep tabs having info send to me on my stock
they are long term with divis and also some accumulative stock like pltr, baba. ca1,
I am happy with portfolio for the time being
For those people with 100+ stocks, why not just buy an index fund or investment trust and take the hassle out of it?
An S&P500 tracker will work favourably for you. Underperforming companies will drop out and better performing companies will come in. The work is done for you in a sense.
I have 8 stocks and 2 investment trusts btw. Index funds are prohibitively expensive to hold in my country (Ireland) due to tax, so I opt for Investment Trusts over Index Funds.
I’ve whittled my T212 account down to 10 holdings: two ETFs and eight ITs: but I think even that’s too many, especially if you consider that one of those ETFs has more than 2,000 holdings.
I’m tempted to prune it further by getting rid of some of the region/country-specific ITs, leaving me with VHVG, VFEG, SMT, MNKS and EWI.
I figure I really don’t need additional allocations to Asia Pacific, Japan, Europe, UK and the US.
