How Many Stocks Should You Own?

Hello All,

If you’re interested in personal finance, you’ve probably thought about stocks. Naturally, when you thinks about stocks, you think about how to avoiding loosing money in the market. This is usually through diversification, e.g. buying a bunch of different kind of stocks.

Well, an interesting article came out in CNN a while back that talked about this issue. The CNN story basically said that the conventional wisdom is flawed. The conventional wisdom is that you need to that you need to purchase a lot of stocks or a mutual fund to get the benefits of diversification.

However, what the CNN story said is that an increasing number of academic studies show that information technology has made markets more efficient, investors who have only 3-4 “winner” stocks have outperformed those who have a greater number of stocks by – and check this out – up to 4% annually. While 4% doesn’t seem like a lot, it does matter, especially if you’ve got a lot of money to invest.

Now, this article flies in the face of 30 years of conventional stock market wisdom. In fact, the whole mutual fund industry has partly been built on this – but the criticism rings true. The best way you can tell if something effectively builds wealth is if rich people do it.

Now, I’m not an expert, but the best data on wealth in America is the 2004 Survey of Consumer Finance – it accurately measures whats up with Americas finances. The 2004 survey found that high net worth households were more likely to hold stocks. And, if shows that high net worth families who hold stocks had only one to three issues. What this suggests to me is that wealthy people are more likely to have concentrated stock positions – e.g. that they are focusing on “winner” investments.

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