When More Stocks Doesn’t Equal More Diversification

Diversification is a topic we often discuss on this blog, and in the video below Jason Zweig of The Wall Street Journal offers some very interesting thoughts on the topic. According to Zweig, many studies have shown that holding 20 to 30 stocks can diversify away much of the risk you’d get by picking just one stock. But, he notes, the problem is that those studies are based on computers randomly generating portfolios — not human beings assembling their portfolios. And, he says, humans “are terrible at doing things that have a quality of randomness”, which can sometimes lead them to create larger portfolios that are actually riskier than those that hold just a few stocks.