PORTFOLIO DIVERSIFICATION FOR LONG HOLDING PERIODS: HOW MANY STOCKS DO INVESTORS NEED?

Abstract

Finance textbooks typically state that 8 to 20 stocks can provide adequate diversification for a portfolio. However, these recommendations usually assume a short time horizon such as one year. We examine 20‐year cumulative rates of return and ending wealth from an initial $100,000 investment allocated among 100 large U.S. stocks. Probability distributions obtained from simulations illustrate the shortfall risk faced by investors who own fewer titan 100 stocks. Five percent of the 20‐stock portfolios have ending wealth shortfalls exceeding 28%. These findings suggest that 8 to 20 stocks may be insufficient for long‐term investors.

Citation

DOMIAN, D.L., LOUTON, D.A. and RACINE, M.D. (2003), "PORTFOLIO DIVERSIFICATION FOR LONG HOLDING PERIODS: HOW MANY STOCKS DO INVESTORS NEED?", Studies in Economics and Finance, Vol. 21 No. 2, pp. 40-64. https://doi.org/10.1108/eb028774