First, a simple answer, followed by some academic thinking on this topic.
In our stock-based portfolios, the most concentrated Personal Portfolio will hold 15-25 stocks while a fully diversified Personal Portfolio is likely to hold 80 or more individual positions.
In our index-based portfolios, your Personal Portfolio will hold 7-9 ETF’s.
The number of positions your account will hold is highly dependent on the recommended investment plan. That's because each of our Personal Portfolio strategies is designed and run as an individual "sleeve" of a portfolio. As a result, each strategy (e.g., Dividend, Small/Mid-Cap, Fixed Income, etc.) is managed as its own unique component. Our portfolio managers aim to diversify the holdings in each separate strategy as completely as their investment approach will allow. When one or more of these sleeves are combined in a diversified Personal Portfolio, the number of overall holdings will, of necessity, increase to allow more complete global market exposure.
The idea that an investor can capture all the benefits of diversification with just a small handful of stocks is a common one and has had numerous proponents over the years (e.g., Ben Graham in The Intelligent Investor; Burton Malkiel in A Random Walk Down Wall Street, etc.). However, most academic studies have focused on volatility, or how far the portfolio's actual returns vary from the average return as a measure of risk. The greater the portfolio volatility, the higher the risk.
Motley Fool Wealth Management believes volatility is an incomplete measure of portfolio risk, since it is possible to have a portfolio with a low volatility that still produces sub-par returns or fails to meet your investment goals. Newer studies ("Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets," by Alexeev and Tapon, November 2014) suggest that the ideal number of stocks needed to reduce the vast majority of diversifiable risk is upwards of 50, and perhaps even higher during times of market distress. There is still healthy debate surrounding this subject, but evidence from more recent market environments seems to point toward a larger number of holdings as optimal for diversification purposes.
So while we can create a fairly well-diversified stand-alone Personal Portfolio for you (e.g., Dividend, Large Cap Core, Large Cap Aggressive Growth, or Hedged Equity), to reap the full benefits of a complete portfolio that includes exposure to all of the major asset classes (large-cap, small/mid-cap, international, fixed income), we recommend incorporating a diversified Personal Portfolio into your financial plan.
If you prefer to make the asset allocation decision on your own, one of our large-cap strategies can be an important part of your overall asset mix.
Let's see what we'd recommend for you
It all starts by filling out this form. It’s secure, and completely free. You’ll answer a few questions about your income level, time horizon, risk tolerance, and financial goals. Then we’ll provide a personalized asset allocation recommendation specifically for you.