How many shares of a stock or how many bonds should you have for diversification? This question often arises and is the subject of a study I have noted, as reported in a financial journal.
Most investors believe they acquire enough diversification when they have mutual funds.The more funds they have, the better. But evidence shows that holding more than one fund often duplicates their holdings and does not add to diversification.
Then, too, there are studies about how many issues need to be in a portfolio for practical diversification. This attempt becomes doubtful because that pursuit becomes a vague effort for most investors. Diversification to overcome risk varies by investor needs and characteristics.
The solution is simple for the average investor. Buy an index, in the form of a mutual fund or an exchange-traded-fund (ETF). That generally provides diversification while allowing for certain industry or country objectives.
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