How many shares of a stock or how many bonds must you have for diversification? This question often arises and is even the subject of a recent study I have noted, and reported in a financial journal.
Most investors believe they acquire adequate diversification when they have mutual funds, the more the better. But evidence shows that holding more than one fund often duplicates holdings and does not actually add to diversification.
Then, too, there are studies about how many issues need to be in a portfolio for practical diversification. I find this attempt dubious because the very pursuit is a vague effort for most investors. Diversification risk varies by investor needs and characteristics.
The solution is simple for the average investor. Buy into an index, in the form of a mutual fund or an Exchange Traded Fund (ETF). That generally provides diversification while allowing for certain objectives, such as area of investment (domestic, overseas, etc.)
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