Ideal number of Stocks in Portfolio you should have - Diwali Pick

Hi readers, recently I read a book written by Joel Greenblatt. There I came across one word “Non Market Risk”. 

In his words, Non Market Risk is the portion of a stock’s risk that is not related to the stock market’s overall movements. Means this risk arises when a company’s factory burns down or when company’s product didn’t sell as well as expected.

So as common saying “Don’t put all your eggs in one basket”. If you do, It is over concentration. So diversify your risk by investing in multiple stocks (companies).

But simply buying more stocks can’t help you avoid market risk, Right? But actually it reduces the alpha - return on your portfolio.

Even you designed your portfolio with total 5000 stocks available in market, still your portfolio is at risk for the up and down movement of the entire market - called “Market Risk”.

Tip: It is better to invest in index mutual fund, if you want to have more stocks in your portfolio ( when you don’t have conviction in your selected stocks)

There is a myth - owning more stocks will reduce market risk, But how many stocks should we have in portfolio?

Let’s start then, As per statics, owning two stocks eliminates 46% of the nonmarket risk of owning just one stock. And the same risk is reduced by 72% with a four stock portfolio. 

And risk will reduced by 81% in a eight stock portfolio.

$$ Reduced by 93% with 16 stock portfolio $$

Reduced by 96% with 32 stock portfolio. And reduced by 99% with 500+ stocks. So

~~ 'Golden Rule' ~~ is “after including 16 stocks in your portfolio, the 'benefit' of adding more stocks to your portfolio to reduce risk is very small”

As per mathematical statics, 16 is the magic number to avoid 93% risk. This is the ' ideal ' number of stocks one must have in a bid to 'aim for alpha' and also reduce nonmarket risk.

Low number of stocks, easy to monitor the company updates, track the results and analyse them keenly. But too low number of stocks, is not good as said above.

Final Tip: select these stocks from different sectors (uncorrelated and negative correlation sectors).

My Diwali Pick - “ Piramal Pharma Ltd “ - Recently this company was listed on exchange after demerger from Piramal Enterprises. Listed at 200, but now it is at 171 due to forced selling from DII, PMS etc., Special situation ( will explain in my next post) is here. For this Diwali 2022, I am going to accumulate Piramal Pharma Ltd stock but don’t buy in one go, better to buy in SIP mode. 

Disclaimer: it’s just my opinion not any buying advice. Please do full analysis of this company or consult your financial advisor before takes position in this stock.