How many different stocks should you hold?
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Active managers should hold only their 20 or 30 best ideas.
PHOTO: AFP
A couple of researchers at financial advisory firm NDVR in Boston, Dr Yin Chen and Dr Roni Israelov, have come up with a new take on an age-old question for investors: How many stocks should you own for a properly diversified portfolio?
The academic approach to finding an answer goes back to a 1968 Journal Of Finance paper by John Evans and Stephen Archer that included a graph that you can find versions of in almost any introductory finance book and many personal finance articles today. They concluded there was little additional diversification benefit once you got beyond 10 or 15 stocks.