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StockCentral :: Community
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Join in on the discussion with other like-minded investors in our community forums. Learn about the fundamental investing methodology and participate in educational workshops in the Investing forums, stay up-to-date on StockCentral news and make suggestions to the StockCentral team in Central Square, and discuss your favorite stock or recent market news in our A-Z ticker-based forums.
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Irina Clements
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| 01/26/2007 12:53 PM |
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I pulled this post from the Vanguard diehards board. See below. So, 2 questions: 1) Is this true? 2) So should we all be in index funds? http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=192863 is the link to the Vanguards post...
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http://kuznets.fas.harvard.edu/~campbell/papers/diversification.pdf
More generally, if you look at academic papers in the 60s, the recommendation was around 10 stocks. In the 70s it had moved to about 20 stocks. In the 80s it had moved to 30-40 stocks, and by the late 1990s academics were suggesting 75-100 or more. Basically, then, you have a rough doubling every decade (my thanks to a former professor for laying all this out).
As that paper briefly discusses, the basic drivers of this effect is that individual stocks are becoming more volatile and the risks they face are becoming more idiosyncratic. Again, I see this dynamic as a product of things like increasingly competitive markets, rapid capital responses to opportunities, risk-pooling, and so on.
As that paper also discusses, the good news is that the benefits of diversification (what is sometimes called the "only free lunch in investing") are increasing. The bad news for stock-pickers, however, is that to capture those benefits you need an ever-increasing number of stocks. |
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Doug Gerlach
Cambridge, MA
http://www.iclub.com/
President, ICLUBcentral
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| 01/26/2007 2:13 PM |
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Posted By Irina Clements on 01/26/2007 12:53 PM More generally, if you look at academic papers in the 60s, the recommendation was around 10 stocks. In the 70s it had moved to about 20 stocks. In the 80s it had moved to 30-40 stocks, and by the late 1990s academics were suggesting 75-100 or more. Basically, then, you have a rough doubling every decade (my thanks to a former professor for laying all this out).
I do recall seeing research just a few years ago that suggested that the number of stocks that were required in a well-chosen quality stock portfolio in order to provide the benefits of diversification had increased from 10-12 to somewhere on the order of 15-20. But what we do here at StockCentral is a far cry from what the Random Walk adherents do.
Doug
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Posting from ICLUBcentral world headquarters in the Harvard Square's historic College House, Cambridge, MA
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