Diversification means adding different sector of companies in your portfolio so that all the stocks do not go down at the same time. Thereby reducing the probability of severe losses during the market is down. It is very common with retail investors who keep adding companies in their portfolio from various sources.
Investor tends to diversify their portfolio so that they can get protect themselves from a specific sector or a company down risk. But sometimes this diversification comes with a heavy pay off. Thereby reducing portfolio profits to a large extent. An average portfolio should contain 10 to 40 companies. But there is no fixed rule on the number of companies which could be in the portfolio. It all depends on the investor’s investing regime. Generally, the more you add, less your profits will be.
Example of diversified portfolios
Lets us take an example of 2 portfolios having of 4 to 6 companies.
1. The first portfolio: has 4 companies
2. The second portfolio: has 6 companies
Clearly, the 1st portfolio has outperformed the 2nd one. It is also commonly known that the larger the portfolio you have, the more efforts you have to make in monitoring it.
It is well known to big ace investors that investing in a lot of companies is not easy. That’s why they also keep their portfolio small as it is easy to track and manage. For reference have a look at these investor’s portfolio
1. Dolly Khanna – portfolio has around 20 companies
2. Rakesh Junjunawal – portfolio has around 40 companies. He also takes positional trades that’s why he’s having large holdings.
3. Radhakrishnan Damani – portfolio has around 20 companies.
As a value and long-term investor, the moment you increase your portfolio above 30 stocks, your return also starts diminishing. It also becomes tiresome to manage the portfolio many times.
Keep your portfolio small which is easy to manage.