Diversification = cop out?

[liz]

I would not think of diversifying unless I had 500K.

So, if you had $400k (say) you would invest it all in one stock?

As soon as you invest in even two stocks (or other types of investment) you are diversifying in a limited way, unless the two investments have perfectly correlated returns.

The maths behind portfolio theory is really not very hard and the conclusions are compelling. There are a few on this thread who would do well to look into it.

 

[TheBloods]

Can't recall the exact number, but you only need to invest in about 30 (?) stocks to achieve close to an optimised portfolio.

 

[Todman]

No way would I have my portfolio spread over thirty stocks.

You could not possibly keep track of all of them.

On past experiences the most I've had is twelve and that was to many.

four to six is what works for me.

 

[Crow-mo]

Can't recall the exact number, but you only need to invest in about 30 (?) stocks to achieve close to an optimised portfolio.

30 is a statistically significant sample, so presumably this could be right.

but I am not sure there is an optimised portfolio, there is an efficient portfolio which is the market. an optimised portfolio I guess could be anything on the SML for the covariance of the stocks, where you maximised return or minimised risk?

I think any serious investor needs to understand this stuff, but once past this, I am slightly more influenced by the Buffet idea that a properly diversified portfolio smooths out the bumps to leave only average returns.
So the term 'optimal' leaves me slightly uncomfortable, though I do appreciate the context.

 

[TheBloods]

I think you'd be looking at buying 30 stocks if you wanted a long-term set-and-forget portfolio (ie: you'd only look at it occasionally). If you want to actively manage it, then I think you'd want to have a single-figured number of investments.

 

[liz]

I don't think you need anything like 30 stocks. I believe the argument is that you can effectively create a portfolio that eliminates all non-market risk - ie one that will pretty much track the index - with about this many stocks. You don't actually need to replicate the index.

My understanding of an efficient (or optimal) portfolio is that for any given number of stocks and any targetted risk level, the efficient portfolio is the one that maximises expected returns. Or for any given number of stocks and any given expected return, the efficient portfolio is the one that minimises risk.

 

[Crow-mo]

I don't think you need anything like 30 stocks. I believe the argument is that you can effectively create a portfolio that eliminates all non-market risk - ie one that will pretty much track the index - with about this many stocks. You don't actually need to replicate the index.

My understanding of an efficient (or optimal) portfolio is that for any given number of stocks and any targetted risk level, the efficient portfolio is the one that maximises expected returns. Or for any given number of stocks and any given expected return, the efficient portfolio is the one that minimises risk.

a bit textbook, but essentially correct.