Given that the law of diversification is about as close as one can find to a consensus belief amongst investors your portfolio is most likely to have at least a few stocks in it. But what if I was to tell you that the level and style of your diversification could be putting your capital significantly at risk?
The truth is that most investors don’t know anything more about diversification than you quot;shouldn’t put all your eggs in one basketquot;. Spending some time trying to understand the ways you might be shooting yourself in the foot could seriously enhance your portfolio returns and stop catastrophic risk. But frankly who would want to trudge through all those finance journals?
Well, err… we did and here’s what we’ve found…
1. You own too many stocks and the costs are crippling you
In 1977 Elton and Gruber published a landmark research note that showed that most of the gains to be had from diversification come from adding just the first few stocks. Adding 4 more stocks to a 1 stock portfolio gives you 71% of the benefits of diversification of owning the whole market. Even owning just 15 stocks brings about…
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