4 ms·
Where could one read up more about this math showing you cannot significantly reduce risk by diversifying more than ~20 streams?
by kovek 9y ago
Where could one read up more about this math showing you cannot significantly reduce risk by diversifying more than ~20 streams?
- cheez 9y agoUnfortunately, I learned it on the job way back though I will keep an eye out of I see it.
- frgtpsswrdlame 9y agoI've also heard of using 30 (not 20) stocks as a sort of rule of thumb for sufficient diversification. I went ahead and looked it up though: In 1970, Lawrence Fisher and James H. Lorie released "Some Studies of Variability of Returns on Investments In Common Stocks" published in The Journal Of Business on the "reduction of return scattering" as a result of the number of stocks in a portfolio. They found that a randomly created portfolio of 32 stocks could reduce the distribution by 95%, compared to a portfolio of the entire New York Stock Exchange. From this study came the mythical legend that "95% of the benefit of diversification is captured with a 30 stock portfolio." http://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp http://www.investopedia.com/articles/stocks/11/illusion-of-d... I would really read the rest of that link though, there's some good stuff in there.
- tanderson92 9y agoThis is about minimizing stock idiosyncratic risk, to capture market beta; there are many other asset classes one could put in a portfolio, diversifying the risks of market beta away.
- dtwest 9y agoThe post said 20 uncorrelated income streams, not random stocks. Random stocks often have high correlations to each other.
- valuearb 9y agoBen Graham and Buffett think diversifying increases risk. How well can you know one girl if your harem has thirty? Statistical models are just models, not the real world.
- cheez 9y agoGraham and Buffett are investors in the truest sense: they invest in the business, not in the stock. They deal with the managers directly. That is not what most of us do. That is why diversifying in such a situation increases risk: you only have so much mental attention.
- valuearb 9y agoNo. Graham was a stock market investor. Buffett never bought a company till nearly 20 years into his career. Buffett and Munger believe in focused portfolios when you are investing in stocks, why put 5% into your 20th best idea when you can put 10% in your 10th best idea? In reality most of us should not buy public equities, we should be in index funds.