January 13, 2017

Why your own stock portfolio is as safe as an index fund

Can my stock investing be as safe as investing in index funds? The advantage of index funds is that they are diversified, meaning that they hold a number of different stocks. This gives you diversification so that not all your eggs are in one basket. But, just how many eggs do you need to be diversified?

Research shows that with 20 to 30 stocks, you have all the diversification benefits you can get. You get the most diversification when you go from stock #1 to stock #2. You get less when you go from stock #10 to stock #11. Furthermore, if you buy large stocks, you already have some diversification, because those companies are involved in many businesses in different markets.

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