The idea that you need 160 stocks to diversify is simply ludicrous. The chart below shows diversification benefits can largely be achieved with 30-40 stock portfolios. That is to say, you can have a return profile with roughly the same volatility as the overall equity market by holding around 30-40 stocks.
An alternative perspective is provided by showing the percentage of non-market risk that is eliminated as the number of stocks in the portfolio increases. This is shown in the chart below. Holding two stocks eliminates around 42% of the risk of owning just one stock, holding four stocks this is reduced by 68%, by 83% by holding 8 stocks, by 91% by holding 16 stocks, by 96% by holding 32 stocks. This relationship is graphed in the chart below. Holding two stocks eliminates around 42% of the risk of owning just one stock, holding four stocks this is reduced by 68%, by 83% by holding 8 stocks, by 91% by holding 16 stocks, by 96% by holding 32 stocks.
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