Key Risk Factors to Consider
In my opinion, the four most important factors that will influence the volatility of your portfolio’s return relative to the market’s return are: (1) the number of holdings; (2) the correlation between holdings; (3) the amount of financial leverage each holding has; and (4) the market cap size of each holding.
The American Association of Individual Investors (“AAII”) wrote an article citing that “holding a single stock rather than a perfectly diversified portfolio increases annual volatility by roughly 30%…Thus, the single-stock investor will experience annual returns that average a whopping 35% above or below the market – with some years closer to the market and some years further from the market.”
While it is highly subjective, I believe the relationships between portfolio value and the number of holdings in the table below provide a reasonable balance between the need for diversification, a desire to keep trading costs low, and a limited amount of research time to devote to maintaining a portfolio.
15 - $25k
25 - 50k
30 - 75k
35 - 100k
45 - 250 k
50 - 500 k
60 - 1m
How to Build a Dividend Portfolio
Source: Simply Safe Dividends
