Here at the Acquirer’s Multiple we believe your equally weighted portfolio should consist of 20-30 stocks generated from our Deep Value Stock Screens.
In general terms, holding more stocks leads to greater diversification, and lower volatility, but is harder to manage and requires more purchases. Fewer stocks reduces the number of purchases, but leads to great volatility, and magnifies the impact on the portfolio of an unexpected event.
So, it was interesting to find an article by Boris Marjanovic, the Managing Director at A North Investments (ANI), who has arrived at a similar conclusion using a very simple formula for figuring out how many stocks you should hold.
Here’s an excerpt from his article:
Studies say the magic number is at least 20 to 30 stocks. I myself prefer to use the 1/N rule as it takes into account investors’ subjective risk tolerances.
The denominator “N” is the maximum percentage (of your equally-weighted portfolio) that you can afford to lose if one of your stocks goes bankrupt. For the typical investor, it’s about 5% – the equivalent of owning 1 / 0.05 = 20 stocks. If you happened to be a more conservative investor, it might be 1% or even lower, in which case you should own at least 1 / 0.01 = 100 stocks.
You can read the complete article here.
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