Adding holdings reduces the damage any single failure can do, but the benefit falls away quickly. Beyond a point, more names add admin and dilute your best ideas without removing much risk.
10 min read · Level 2
I think the honest question behind portfolio size is whether you have an edge at all. If you do, it lives in a small number of positions and a long list dilutes it. If you do not, a broad fund gives you the diversification without pretending to a skill you have not demonstrated. The uncomfortable middle - forty hand-picked holdings nobody has time to follow - gets the costs of both approaches and the benefits of neither.
Diversification removes the risk attached to individual holdings. It cannot remove the risk that affects everything at once.
Risk type Removed by diversification? Unsystematic yes - one company failing, one property flooding Systematic no - recessions, rate shocks, market-wide falls
The simplest way to see the effect is the damage one total loss does at different portfolio sizes:
Holdings Equal weight each Loss if one goes to zero 1 100% 100% 5 20% 20% 10 10% 10% 20 5% 5% 40 2.5% 2.5%
Going from 1 holding to 10 removes 90 percentage points of single-name damage. Going from 20 to 40 removes 2.5. The benefit shrinks fast, while the work of following 40 positions does not.
Where the right number sits depends on what you hold:
Holding type Practical range Broad index funds one or two funds already hold hundreds of companies Individual listed shares often 15 to 30 for most private investors Early-stage private investments more, because most return nothing
Early-stage investing is the exception that proves the rule. When a large share of positions return zero and results depend on rare outliers, holding 25 or more is about giving yourself a chance of owning one of the few that matter, not about smoothing volatility.
Because both extremes are common and costly. A portfolio of three shares can be destroyed by one failure. A portfolio of eighty individual holdings is usually an index fund with extra fees, extra tax events and no chance of anyone following them properly.
It also frames the trade-off honestly: every holding you add dilutes your best idea. If you genuinely have an edge in a handful of positions, holding fifty removes it; if you do not have an edge, a broad fund is the simpler answer.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Three investors with 100,000 in listed shares.
Investor Holdings Position size One failure costs Time to follow them A 4 25,000 25,000 manageable B 20 5,000 5,000 a few hours a quarter C 60 1,667 1,667 impractical for most people
A single failure costs Investor A fifteen times what it costs Investor C. But moving from B to C only reduced the damage from 5,000 to 1,667, while tripling the research burden - and C almost certainly cannot know sixty companies well. For most people in C's position, a broad index fund would deliver similar diversification with far less work.
Adding holdings to feel safer without asking what risk each one removes. Beyond roughly 20 to 30 listed positions, extra names mostly add work rather than protection.
Distinguish broad funds, which are already diversified, from individual positions where you are expressing a view.
Work out what a total loss in your biggest position would cost as a share of the portfolio.
Be honest about the hours you will spend, and use funds for exposure you cannot monitor.
Where most positions return nothing, plan for a larger number of smaller cheques.
When building a portfolio from individual holdings, or deciding whether to add another position.
Do not use a holdings count as the only measure of diversification. Twenty companies in one sector, or twenty funds tracking the same index, are less diversified than the number suggests.
Advisers frequently describe private investors whose holdings grew one purchase at a time over decades, ending with dozens of small positions that were never reviewed as a whole, often including several funds tracking the same market alongside individual shares in the same sectors.
Review the portfolio as a single object once a year. Diversification is a property of the whole, not of each purchase.
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