How Many Stocks Are In Your Portfolio?
I recently read a study by Wei Dai, a PhD with Dimensional Fund Advisors. The study discussed how diversification (read: the number of securities within a portfolio) impacts the reliability of returns. The key takeaway from her paper was this – broad diversification, combined with long-term investing (5-10 years) can improve the reliability of investment outcomes.
A strategy that is not well diversified may exclude from its holdings the companies that ultimately generate investment premiums. In other words, the odds are stacked against portfolios with fewer names. Wei shows that a well diversified strategy would have at least 200 names while over 75% of U.S. based mutual funds have less than that number. The strategies we employ seek to capture identifiable alpha through broad diversification with well-over 10,000 securities in only a handful of individual funds.
If you are interested in a copy of the paper from Dimensional Fund Advisors, please click here to reach out to a member of our team.