Holding a concentrated portfolio is not as risky as one may think.
Just holding 2 stocks instead of 1, eliminates 46% of your unsystemic risk.
Holding only 8 stocks will eliminate about 81% of your diversifiable risk.
What about the range of returns?
Average return of the stock market during one period examined was about 10%.
Statistically, the one-year range of returns for a market portfolio (holding scores of stocks) in this period was between -8% and +28% about two-thirds of the time. One-third of the time, the returns fell outside this 36-point range.
If your portfolio is limited to only 5 stocks, the expected return remains 10%, but your one-year range expands to between -11% and +31% about two-thirds of the time.
If there are 8 stocks, the range is between -10% and +30%.
Conclusion
It takes fewer stocks to diversify a portfolio than one might intuitively think.
Just holding 2 stocks instead of 1, eliminates 46% of your unsystemic risk.
Holding only 8 stocks will eliminate about 81% of your diversifiable risk.
What about the range of returns?
Average return of the stock market during one period examined was about 10%.
Statistically, the one-year range of returns for a market portfolio (holding scores of stocks) in this period was between -8% and +28% about two-thirds of the time. One-third of the time, the returns fell outside this 36-point range.
If your portfolio is limited to only 5 stocks, the expected return remains 10%, but your one-year range expands to between -11% and +31% about two-thirds of the time.
If there are 8 stocks, the range is between -10% and +30%.
Conclusion
It takes fewer stocks to diversify a portfolio than one might intuitively think.
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