A counter-intuitive math problem
Friend showed me his portfolio last weekend. Seven mutual funds. Said he was well diversified. I asked him how many stocks he actually owned. He did not know.
15 STOCKSof diversification benefit captured
30 STOCKSof diversification benefit captured
80 STOCKSof diversification benefit captured
After 30 stocks, you are not diversifying. You are diluting.
The diversification curve climbs steeply to about 20 names, then bends flat. The 60 holdings between stock 20 and stock 80 are buying you four percentage points of variance reduction. They are also buying you cost, brokerage and a long tail of names too small to move the outcome.
Swipe . What a 7-fund stack actually looks like →