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How much should you diversify?
I have a question regarding the stated results of highly diversified investment newsletters. Are these newsletters really practical for the average investor? I mean, many of these newsletters recommend a large number of stocks in order to match those results. "I would need to spend a large part of my day monitoring such a portfolio!" Hard-core investment letter types pooh-pooh this. With modern software, they say, you can review 30 stocks or more in just a few minutes. And there's a strong argument that you should do this.

Years ago, the conventional wisdom among finance academics was that you could fully diversify against stock market risk with a portfolio of only 15 to 20 stocks. As in so many other ways, the conventional wisdom has been revised -- basically because individual stocks have systematically become more volatile. Now, research suggests the diversified portfolio requires at least twice as many stocks.

Mark Hulbert's at the Hulbert Financial Digest seems to indicate that larger portfolios achieve systematically higher returns than portfolios with 10 to 20 stocks. Of course, not diversifying can result in spectacular success. The top-performing letter of 2004, according to performance data compiled by the Hulbert Financial Digest, was, up 150.3 percent. But Hager achieved its success in large measure with one stock: Rambus (RMBS) , a designer and licenser of intellectual property related to memory chips.  Yesterday, Rambus hit an air pocket (not for the first time) when its fourth-quarter showed unexpected declines because of the cost of the litigation which is possibly its main claim to value. The stock fell more than 16 percent Wednesday, closing at $17.85. More about Fred.

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