Many Irish investors buy individual shares rather than exchange-traded funds (ETFs) to avoid the penal tax treatment of funds. However, building a properly diversified portfolio may require far more stocks than one imagines.<\/p>\n
The classic rule of thumb, dating back to 1980s research, held that a portfolio of about 30 to 40 stocks was enough to eliminate most company-specific risk. That number may be far too low, say the authors of Fomo in Equity Markets?, which analyses more than 87,000 stocks across four decades. <\/p>\n
Even a portfolio of shares in 100 companies doesn\u2019t eliminate the role of luck: an \u201cunlucky\u201d selection could lag a more fortunate one by several percentage points annually.<\/p>\n
So how many stocks is enough? The researchers suggest true diversification may require hundreds \u2013 perhaps as many as 750 \u2013 to closely match the overall market.<\/p>\n
The reason is that market gains are dominated by a tiny few: just 2.1 per cent of companies created all net wealth, and only 30 companies \u2013 big winners such as Apple and Microsoft \u2013 generated a quarter. Most stocks, meanwhile, do little for investors, with 59 per cent failing to beat Treasury bills.<\/p>\n
This leads to what the authors call \u201cFomo risk\u201d \u2013 the fear of missing out. When returns are driven by a handful of outliers, smaller portfolios face a higher chance of simply never owning shares in the companies that generate the market\u2019s biggest gains.<\/p>\n
For fund-avoiding Irish investors, that creates an awkward trade-off: 30 or 40 shares may miss the market\u2019s rare winners, but assembling a portfolio of several hundred stocks would surely test the stamina of even the most diligent amateur.<\/p>\n","protected":false},"excerpt":{"rendered":"Many Irish investors buy individual shares rather than exchange-traded funds (ETFs) to avoid the penal tax treatment of…\n","protected":false},"author":2,"featured_media":23726,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[155400,61,60,80],"class_list":["post-358956","post","type-post","status-publish","format-standard","has-post-thumbnail","category-technology","tag-how-to-invest","tag-ie","tag-ireland","tag-technology"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/358956","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=358956"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/358956\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/23726"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=358956"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=358956"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=358956"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}