How many stocks do you have in your stock portfolio?

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Do you have concentrated portfolio as practiced by Warren Buffett, or do you have a well-diversified one?

The more concentrated the portfolio, the greater the return but the risk is also higher. The more stocks you have, the smaller the risk but the return is also smaller.

How do you find the balance?

Studies have shown that the benefits of adding stocks to a portfolio decrease with the size of the stock portfolio. The chart below extracted from “A Random Walk Down Wall Street” by Burton G Malkiel illustrates the diminishing return feature.

[Image: Margin-benefit-of-diversification.png]

There are other studies that show similar pattern although they differ in the number of stocks when the return starts to diminish. These ranged from 10 to 40 stocks.

That is why I target 30 stocks in my portfolio. Of course, life is not so simple as the studies assumed some correlation between the stocks. In reality, this is not true.

Secondly, many studies are based on a random selection of stocks. In practice, stock selection is not random.

But I have not found a better theory for a bottom-up stock picking portfolio. For more insights go to “Baby steps in constructing a stock portfolio”
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