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40 stocks & Diversification

40 stocks & Diversification

Can/Do you sufficiently spread out your risk by holding a large number of different securities across sectors, industries, and companies? This spreading out of risk, or diversification, is one of the basic...

40 stocks - chance of losing money in a given year WITH positive Benchmark-Returns (ca. +6% benchmark)

This example above shows the mathematical probability of losing money in a single year when the market return is 6% if the investor selects stocks at random (i.e., has no stock selection skill). Calculations include standard deviation assumptions of 23.8%, 9.1%, and 5.3% for the 5-, 20-, and 40-stock portfolios, respectively, and assume a normal distribution of returns.

...tenets of modern portfolio theory, which holds that you can reduce the risk (volatility) of the overall portfolio by owning a number of securities that tend to move independently of each other.

The illustration above shows how diversifying, or introducing more securities, helps reduce the overall risk of a portfolio. The fewer securities you hold, the likelier it is that a decline in one of them could adversely affect the whole portfolio; a larger pool of securities tends to spread that risk.

One way (and maybe the cheapest way) is to reap the benefits of diversification is through index investing - the practice of investing in a fund with a portfolio of securities that mirrors a particular index. But this method wasn’t always available! ETF & Co. another story...

Personally, I (Ralph Gollner) currently own more than 40 stocks and they are part of my intent for diversifying my portfolio.

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