How Many Holdings Is Enough?

Too few holdings leaves you exposed to one company’s bad news; too many and you are just paying to own an index. Here is what research says about diversification and how to decide.

The risk you can diversify away

Every stock carries two kinds of risk: market risk, which hits almost everything when the whole market falls, and company risk, which comes from one business: a failed product, a scandal, a lost customer. Diversification cannot remove market risk, but spreading money across many companies shrinks company risk dramatically.

Each share is a slice of one company. Diversifying means owning slices of many.

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