You may have heard of the phrase "Don't put all your eggs into one basket".
You may wonder, "How many 'baskets' should I have?" How much should you diversify your investment?Some are led to think that it is difficult for small investors to diversify since diversification requires a lot of money. This is one of the selling points for Unit Trusts or Mutual Funds.
However, according to Dr Neoh Soon Kean in his book "Stock Market Investment in Malaysia and Singapore", based on research, it has been discovered that one requires a surprisingly small number of shares to reap the benefit of diversification. The table below shows the result of a piece of research work on the beneficial effect on diversification which Dr Neoh has carried out locally.
The table shows how the standard deviation (a measure of variability) of an investment portfolio decreases as the number of shares in the portfolio increases for a particular period in time (1983). It shows that with an 8-stock portfolio, 87% of the beneficial effect of a 32-stock portfolio has been achieved. With a 16-stock portfolio, 94% of the total risk reduction possible is attained. Thus, it is obvious that it is not necessary to have a very large number of shares in order to achieve a great deal of the total possible benefit from diversification. In fact, after 8 shares, the benefit of diversification increases only slowly. One requires a further increase of 24 shares just to get an additional reduction of 0.5 % in variability. Thus, for a typical small investor, diversification means a portfolio of 8-10 shares which is not beyond the capability of many small investors. (Info taken from Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean)
The table shows how the standard deviation (a measure of variability) of an investment portfolio decreases as the number of shares in the portfolio increases for a particular period in time (1983). It shows that with an 8-stock portfolio, 87% of the beneficial effect of a 32-stock portfolio has been achieved. With a 16-stock portfolio, 94% of the total risk reduction possible is attained. Thus, it is obvious that it is not necessary to have a very large number of shares in order to achieve a great deal of the total possible benefit from diversification. In fact, after 8 shares, the benefit of diversification increases only slowly. One requires a further increase of 24 shares just to get an additional reduction of 0.5 % in variability. Thus, for a typical small investor, diversification means a portfolio of 8-10 shares which is not beyond the capability of many small investors. (Info taken from Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean)
0 comments
Post a Comment