We believe strongly in portfolio diversification, and
our advice is that a portfolio initially not have more than 5% invested in any
one stock and that, generally, we do not concentrate more than 20-30% in any
one industry group or sector. Studies* have shown that maintaining
approximately 15-20 stocks in a portfolio eliminates the majority of the
portfolio’s unsystematic risk (see graph).
*Academic studies show as you increase the number of stocks in a portfolio, the portfolio’s risk falls toward the market risk. One study showed it only took about 12 to 18 stocks in a portfolio to reach the point of maximum diversification. Another study indicated it took 30. Whatever the number, it is significantly less than all the securities.The graph shows that the portfolio’s total risk falls toward the market risk as the number of stocks in the portfolio increase.