Diversification in Portfolios of Individual Stocks: 100 Stocks Are Not Enough

Dale L. Domian, David A. Louton and Marie D. Racine

The Financial Review, 2007, vol. 42, issue 4, 557-570

Abstract: We examine returns and ending wealth in portfolios selected from 1,000 large U.S. stocks over a 20‐year holding period. Shortfall risk, the possibility of ending wealth being below a target, is a useful metric for long horizon investors and is consistent with the Safety First criterion. Density functions obtained from simulations illustrate that shortfall risk reduction continues as portfolio size is increased, even above 100 stocks. A slightly lower risk can be achieved in small portfolios by diversifying across industries, but a greater reduction is obtained by simply increasing the number of stocks.

Date: 2007
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