Entering text into the input field will update the search result below

How Many Stocks Make Up A Well-Diversified Portfolio?

Sep. 16, 2016 11:15 AM ETSPY26 Comments
David Krejca profile picture
David Krejca


  • At some point, every investor must have asked what is the ideal number of securities in a portfolio.
  • Pioneering work on this topic by Evans and Archer (1968) shows that portfolio sizes beyond 10 stocks do not make much sense.
  • Even though some later studies proved the opposite, consensual answer to this decades-old question seems to be in accordance with the tenets of focus investing.

It has not been a long time since I submitted my dissertation on constructing and maintaining an optimal investment portfolio. As a part of the thesis, I revisited one of the most frequently asked questions regarding portfolio diversification and I tried to identify if there is any consensus on the optimal number of securities one should have in a portfolio.

First, it is absolutely essential to differentiate between two types of risk - systematic and non-systematic - which together form total portfolio risk, commonly measured by standard deviation of portfolio returns. Systematic risk, also known as market risk, is the uncertainty inherent to the entire economy stemming from events such as sudden changes in inflation rates, interest rates hikes or geopolitical conflicts. In contrast, non-systematic risk, also known as idiosyncratic risk, has its sources in firm and industry specific events.

Already in the early 1950s, Harry Markowitz presented an ingenious theoretical framework for portfolio risk reduction, which is still frequently used today. Markowitz (1952) demonstrated that it is possible to completely eliminate the non-systematic component of total portfolio risk through diversification across various assets with returns that do not co-vary with each other.

More than a decade later, Evans and Archer (1968) attempted to quantify this finding by performing two different statistical tests on the data of 470 securities listed in the S&P500 index (NYSEARCA:SPY) index from January 1958 to July 1967. The results of their analysis revealed that much of the non-systematic portfolio risk is taken away by the time 8th security is added to the portfolio. The paper also suggests that portfolio sizes beyond 10 securities might be hard to justify from an economic point of view as more resources are needed to analyze additional securities.

However, this conclusion is in sharp contrast with the practice of investment management

This article was written by

David Krejca profile picture
Research analyst, individual investor. Queen Mary University of London alumnus. Successfully passed Level I of the CFA Program (June 2016). Seeking growth-at-a-reasonable-price (GARP), income and profitable growth opportunities regardless of geography, industry and market cap. Value, recent IPOs and high-growth companies. All articles are my opinions and do not constitute investment recommendations or advice.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.