Make Consistent Money

The More Diversified You Are, the More Likely you are to Make Consistent Money.

While some diversification is good, it is often easy to get carried away. Too much diversification can, in fact, be bad for you. You don’t need to hold hundreds of securities to be properly diversified. Nobel Prize winner William F. Sharpe published on article in 1972 on the effect of diversification on nonmarket risk.(“Risk, Market Sensitivity and Diversification,” Financial Analysts Journal, January/February 1972, pp. 74-79.) As the graph below shows, increasing the number of securities held does reduce your risk, but the reduction becomes negligible once the portfolio reaches 25 or 30 securities, spread across several industries. Indeed, the plot becomes asymptotic at the level of 35 holdings.