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How to get the balance right with stocks

by , 14 September 2015

Diversification is a well-known way of reducing your overall investment risk.

By spreading your investments across different asset classes you reduce risk, but spread too much and your returns will suffer.

So how can you get the balance right in your stock portfolio?

Read on to find out…

The goal of diversification

Diversifying your portfolio is a commonly used investment strategy to lower your risk. Ideally you want to hold a range of assets including stocks, property, gold, bonds and cash.

The idea is that different asset classes move in different ways. You benefit from the trade-off between risk and reward.

For many investors, the most important and largest part of their investment portfolio is stocks.

How many stocks should you invest in?

When it comes to stocks, investing in just one or two is a risky move. You’re entire stock portfolio is dependent on the share price movements of these two stocks.

There have been numerous studies done on this over the years, Matthew Partridge in Money Week explains. The research points to holding between ten and 20 stocks to gain diversification without sacrificing too much on returns.

Research done by EJ Elton and MJ Gruber in 1977 found that the biggest impact of diversification comes from investing in 15 stocks. More than that and the lowering risk effect peters out.

Another thing you need to weigh up is trading costs. The more stocks you invest in, the more you’ll be paying to your broker in fees and costs. This eats into your returns.

How best to balance your investments in stocks

It all comes down to how much work you want to do.

If you want a low maintenance portfolio, investing in a broad range of exchange traded funds (ETFs), which track different sectors of the market, should give you the diversification you need.

If you want a more hands on approach, aim to hold between 15 and 20 stocks. These stocks should be across different sectors too.

So there you have it. How to get the balance right with stocks.

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How to get the balance right with stocks
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