Hi everyone! I’m relatively new in this world (value investing) and got a question about diversification of portfolio. My question is; how diversified a particular portfolio should be? Is there any limit on how many stocks to be included in a portfolio? I am wondering to know if the concept of “the law of diminishing value” can be applied here. Thanks.
Dan Naumov: Academics believe you need 25-30 stocks to have a diversified portfolio with little systemic risk. Managing and keeping up with 50 or more stocks is a full-time job when you consider the required time commitment.
Evan Lea: I recommend 1 to start. Work your way up to 5. Buffett has over half his portfolio in 5 stocks. If you have a really good idea, act on it. No point spreading your money around to decent or average ideas when you have one great one you that has a higher chance of success. High concentration is the way to beating the market. “Put all your eggs in one basket, and watch that basket”.”Diversification is important, but if you diversify too much, you end up owning a lot of companies that you don’t understand well or are able to fully follow. Diversify your portfolio, but put more money behind your best ideas — those ideas that you’ve done the most work on, understand the best, and think have the most long-term upside.”
Giancarlo Sherman: Unless you are a pro investor just invest in an index fund. You’ll be well diversified and will be able to sleep at night
Evan Lea: If you’re going to go the index fund route, Buffett recommends ‘VOO’ – Vanguard S+P 500 Fund or some other CHEAP index.
Evan Lea: https://finance.yahoo.com/q/h?s=VOO+Headlines
Reza Rahbeen: Thanks heaps for sharing your valuable opinions; I appreciate it.
Ketul Kothari: Don’t overdiversify. You don’t need 50 positions. There’s harm to having too many positions as then you are allocating capital to companies just for the sake of diversifying. You should focus on allocating capital to just a handful of your best ideas for the best chance of outperformance relative to risk
Brian Foote: Between 4-6 at the least and 30-45 at the most. depending on how well your guts can handle volatility. I have a weak gut and no money so I go with 18 ish.