How Many Stocks Do You "Need"?

Diversification-seekers always want to know what the optimal number of investments is. You want to have enough holdings to moderate volatility in your portfolio, but you don't want too many holdings because they may dilute your possible returns and overcomplicate your investing life.

Various studies have suggested that you can build an adequately diversified equity portfolio with 15 to 30 stocks. In his 1930s classic, The Intelligent Investor, Benjamin Graham said that the magic number was somewhere between 10 and 30 stocks. In the late 1960s, John Evans and Stephen Archer concluded that 10 stocks were enough. And in the 1970s, Burton Malkiel said 20 stocks will do in A Random Walk Down Wall Street.

Don't let these numbers mislead you, though. For starters, most of these 'how many stocks' stories assume random investing--and investing is anything but random (unless you're the type to choose investments by throwing darts at stock tables). Each investor has his or her own investment style. For example, an aggressive investor may end up with a portfolio that skews toward growth stocks, or someone in the healthcare industry may end up with a heavy weighting in that sector. Such portfolios, while diversified across many names, may not be as diffuse as they look.

It's also important to note that some studies, including one by Malkiel, show that the volatility of stocks has risen over the past few decades. As a result, the number of stocks you need to mute volatility today is likely far greater than 15.

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