The number of investments required to be adequately diversified depends on a few factors. For most individual investors, the number is not very high. It does depend on what is held in the portfolio and the dollar size of the portfolio overall. This week, I provide a few guidelines.
Let’s start with stocks. We suggest holding a minimum of 10 stocks to those following our Model Shadow Stock Portfolio or VMQ Stocks, 12 for those following AAII Dividend Investing (DI) and 16 for those following our Stock Superstars Report (SSR). The total number of stocks held in our portfolios are 20 for VMQ, 24 for DI, 31 for Shadow Stock and 36 for SSR.
Three of the four portfolios (VMQ Stocks, DI and SSR) have a fixed number of positions. The number of holdings in the Model Shadow Stock Portfolio can rise if a strong-performing stock is sold. This is because the proceeds from the sale will be split to fund two or potentially three purchases. With all of our model portfolios, a dollar amount equal to the average size of all existing holdings is allocated to new purchases. Using VMQ Stocks as an example, the portfolio was built by dividing the starting account balance of $100,000 evenly among 20 stocks. The target amount used to purchase replacements for stocks sold in the future will be the total portfolio value divided by 20, or 5% of the total portfolio. The AAII InvestoGraphic linked to below explains this concept further.
More on AAII.com
- How Many Stocks Do You Need to Be Diversified? – This 2004 AAII Journal article gives a different take, but shows how diversification is affected by the number of stocks held.
- Asset Returns During High and Low Inflationary Periods – Craig Israelsen shows how different assets perform in high and low inflation environments and discusses his seven-asset portfolio.
Highlights from this month’s AAII Journal
- Adjusting Overweight Positions – This AAII InvestoGraphic explains how to pare down a position in a stock whose gains have caused it to have an outsized weighting relative to the other portfolio positions.
- Guidance on How to Follow the Level3 Passive Portfolio – Changes to this four-fund portfolio should be infrequent, with investors able to rebalance through additions or withdrawals.
AAII Sentiment Survey
Bullish sentiment rose to its highest level since February, and is above its historical average for just the second time in 15 weeks. More about this week’s results.
- Bullish: 38.9%, up 3.9 points
- Neutral: 34.4%, down 4.3 points
- Bearish: 26.7%, up 0.4 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
AAII Asset Allocation Survey
Fixed-income allocations fell to their lowest level in nearly a decade. Plus, the majority of survey respondents said rising rates are not affecting their cash allocations. More about the latest results.
- Stocks and stock funds: 70.0%, up 2.5 percentage points
- Bonds and bond funds: 14.1%, down 1.8 percentage points
- Cash: 15.9%, down 0.7 percentage points
- Stocks: 31.2%, unchanged
- Stock funds: 38.8%, up 2.4 percentage points
- Bonds: 2.6%, down 0.5 percentage points
- Bond funds: 11.6%, down 1.2 percentage points
Take the Asset Allocation Survey.
What’s Trending on AAII
The Week Ahead
The Federal Open Market Committee (FOMC) will hold a two-day meeting starting on Tuesday. The CME’s FedWatch Tool is placing a 91% chance of a quarter-point rate hike being announced. The meeting announcement and updated committee member forecasts will be released Wednesday at 2:00 p.m. Eastern Time. Federal Reserve Chairman Jerome “Jay” Powell will hold a press conference at 2:30 p.m.
The week’s first economic report will be the May Consumer Price Index (CPI), released on Tuesday. Wednesday will feature the May Producer Price Index (PPI). May import and export prices, April business inventories and May retail sales will be released on Thursday. Friday will feature the June Empire State Manufacturing Survey, May industrial production and capacity utilization and the University of Michigan’s preliminary June consumer sentiment survey.
The Treasury Department will auction $32 billion of three-year notes and $22 billion of 10-year notes on Monday, and $14 billion of 30-year bonds on Tuesday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!