Diversify Away Systematic Risk with as few as 25-30 Stocks
Michael Joyce was recently interviewed by Medical Economics. In this video clip, Michael reminds doctors that they should not over-complicate investment diversification. Please see the video transcript below in italics:
Don’t Over-Complicate Investment Diversification
Medical Economics: A few moments ago, you used a term that I didn’t quite catch regarding diversification in a portfolio and you had talked about simply investing in a lot of things. What was that term you used? And is it possible to have a portfolio that is spread too thin — or you think you have a lot of things in it and that means you’re diversified, but maybe you’re not?
Michael Joyce: Yes. There was a legendary mutual fund manager by the name of Peter Lynch who ran the Fidelity Magellan Fund for many years and he used the term I just used – it’s called “deworsification”. That is, you’re invested in so many things that it’s not actually providing a benefit on a risk-adjusted basis. You don’t need to be invested in 800 different stocks. There have been many academic studies that have shown that you can diversify away the systematic risk with a diversified portfolio with as little as 25-30 stocks. If you’re invested in a mutual fund or an exchange trade fund (ETF), it is highly likely to have that kind of diversification in the portfolio. But in terms of diversification, that’s good, but you can carry it too far where it’s really not providing any benefit to your risk-adjusted returns.