How Much Diversification is Enough?

I have talked quite a bit lately about diversification, especially holding a larger portion of cash than usual.  As most of you know, I run most of my client portfolios with a minimal amount of positions compared to most managers, especially mutual funds and ETFs.

Most of the research that I have done on the topic of diversification indicates that to have a truly diversified portfolio, one only needs about 20 to 30 positions.  Granted you can't have 50% of a portfolio dedicated to one sector such as tech even though companies may be in different industries such as hardware, software, or services, for example.  You have to have the right kind of diversification within your equity portfolio.

So what does the right kind of diversification look like?  In my opinion, it is a combination of small, mid, and large-cap companies.  Additionally, it is a combination of various sectors in which there about ten main ones.  Other factors to consider are company styles which could be is growth vs. value, dividend vs. non-dividend, cyclical vs. non-cyclical.  Hopefully, you get the point that this type of balance requires a tremendous amount of time, research, and understanding.

As Ben Carlson points out in this article, "will a simple stock/bond portfolio do the trick? I think so. Could you do better than a simple stock/bond portfolio? I think so. Could you also do much worse than a simple stock/bond portfolio? Absolutely. And I would argue that most investors end up doing worse because they try to do better."

Again it takes time, understanding, and attention to detail to handle managing your life financial assets.  For the DIY people that have a real passion and more importantly, the time to manage their own assets it can be gratifying.  For those who do not which I would imagine is the vast majority of people, it may be time to look for an advisor to help not only manage your financial assets but help develop a complete wealth management plan which includes not only financial goals but life goals as well.