Diversification is usually thought of as a way to reduce risk, so that’s where I’ll begin.  At its heart it’s a pretty simple concept and one with which you’re probably already familiar, but the basics are important.  I would say that at least 80% of your investment results will come from a dedicated and consistent application of the basics, and only 20% from anything that looks even remotely clever.

But back to that question: Just how many different shares should you hold in your portfolio?

Diversification by numbers

The most basic kind of diversification is where you put money into many different companies rather than just one.  Diversifying into many companies is sensible because the stock market and the future are uncertain and putting all your eggs in one (or just a few) basket(s) really is a bad idea for most people most of the time.

Opinions vary on this question of how many, but I prefer to stick within Ben Graham’s guidelines, where he said:

“There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty”

My personal preference is to hold more rather than less, so currently I target 30 stocks.  When I started out as a stock picker I targeted just 10 holdings because I wanted to concentrate on my “best ideas”.  I also wanted to research the stocks deeply and that requires time, so owning less stocks left me time to have a life.

However, over the years I have gradually moved to a less concentrated portfolio.

Diversify so that you can sleep at night

I moved to 30 holdings partly because I didn’t feel comfortable with so much money invested into each idea.  If you hold 10 stocks the starting position size is 10%, but it can easily reach 20% if a particular investment does really well.  20% in one company makes me very uncomfortable, especially when that company’s shares could halve in value, which would cost the portfolio 10% from just that one investment.

With 10% or more in one company I tend to get nervous.  I’ll start watching the news for that company and when some bad news comes out (trust me – every company gets bad press at some point whether it deserves it or not) I’m much more likely to make an emotionally driven, low…

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