Franklin Otis Booth Jr., one if the wealthiest men in America said “Diversification is dilutive of superior investment results” was the best investment advice he every heard.My Reply;
if i were smarter i would agree with himI have to say I am not sure why my co-worker sent me the email but it isolates two schools of thought about diversification. Some would tell you are diversified with only ten stocks while some portfolio managers own a 100 names for clients. I don't think there is a right or wrong to this just a matter of individual preference and any method chosen will have advantages and drawbacks.
Too few stocks and one blow up hurts the portfolio by a noticeable amount, too many stocks and you run the risk of a very expensive index fund.
I have written many times about 40-45 holdings being about right for the way I manage accounts. The thinking is simple as most of the names account for 2% or 3% of the portfolio. If a stock doubles in a year, with forty names there is a good chance that one or two stocks will go up that much, it could add as much as three percentage points to the entire portfolio. Combine that with an above market dividend yield, like in the mid two's, or higher, and you are adding 500 basis points to the portfolio before you even get started, which could be a bug chunk of what the portfolio needs to do that year depending on how the overall market does.
By the same token a 3% holding that cuts in half on you will simply cause a little lag as a worst case scenario.
Twenty holdings seems to be a popular number but for me that numbers places a lot more emphasis on having to be more narrowly correct. I find with 40 names there is less riding on my being right about which stocks will do well in a given time period.
Obviously a lot people want to try to be specifically correct about what 25 stocks will do the best this quarter. If you are active enough with your investing that you read stock market blogs you are probably well on the way to having this figured out for yourself but this can be evolving thing for most do-it-yourselfers.
If you are in the 20-25 camp and the late February dip caused you too much anguish you might want to revisit your method.