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Aaron Brown

Diversifying? Volatility Matters More Than Size

How many stocks do you need to have a properly diversified portfolio? Bigger is generally better, but it depends more on your luck. 

Ignoring volatility can be fatal to your investments.

Ignoring volatility can be fatal to your investments.

Photographer: Paul Yeung/Bloomberg via Getty Images.

A couple of researchers at financial advisory firm NDVR in Boston, Yin Chen and Roni Israelov, have come up with a new take on an age-old question for investors: How many stocks should you own for a properly diversified portfolio? The academic approach to finding an answer goes back to a 1968 Journal of Finance paper by John Evans and Stephen Archer that included a graph that you can find versions of in almost any introductory finance book and many personal finance articles today. They concluded there was little additional diversification benefit once you got beyond 10 or 15 stocks.

The conclusion by Evans and Archer, echoed in much of the subsequent work on the issue, has some implications for the investors that Chen and Israelov challenge: