Twenty holdings capture about 93% of the diversification available. The next eighty buy you another five percentage points.
That is not an opinion. It falls out of one equation, and it is the reason the debate between "own everything" and "own your best ten" is usually conducted at the wrong level — because on risk alone, the interesting decisions all happen below twenty, and above twenty almost nothing happens at all.
Where the curve flattens
Equally weighted holdings · 30% single-stock volatility · 0.30 average correlation
| Holdings | Portfolio volatility | Share of the possible reduction captured |
|---|---|---|
| 1 | 30.0% | 0% |
| 2 | 24.2% | 43% |
| 5 | 19.9% | 74% |
| 10 | 18.2% | 87% |
| 20 | 17.4% | 93% |
| 30 | 17.1% | 95% |
| 50 | 16.8% | 97% |
| 100 | 16.6% | 99% |
| 500 | 16.5% | 99.7% |
Look at the second row. Going from one holding to two removes 43% of the diversifiable risk. From two to five removes another 31 points. And then it stops mattering: from twenty to five hundred, the whole journey is worth about seven percentage points of the available benefit.
The floor is the point. At 16.4%, whatever you do, you are left holding the market — because the risk that all shares share cannot be diversified away by owning more shares. It can only be diversified away by owning something that is not shares.
The first holding to the second does more for your risk than the twentieth to the five-hundredth.
The number that matters is behavioural, not statistical
If the maths says twenty, why does anyone own sixty? And why do some very successful investors own eight?
Because volatility is not the only thing being managed. Two other constraints bite long before the statistics do:
- How many businesses can you actually follow? Owning a company means reading its results four times a year and knowing why you hold it. Most people, honestly, can do that for ten or fifteen. A portfolio of sixty is not diversified — it is a list, and lists do not get read.
- How large a position can you hold through a bad year? At twenty holdings each is 5% of your money. At eight it is 12.5%, and a 50% fall in one of them costs you 6% of everything — enough to be felt, and felt positions get sold at the bottom. The right concentration is the one you can ignore.
- What is the worst outcome you can survive? Not the average. Companies go to zero: our own library contains businesses that have lost four-fifths of their value while remaining listed. Position size is the only defence against being wrong about one of them, and it is decided in advance or not at all.
Diversification limits how badly you can do and how well. Somebody holding five hundred positions cannot be ruined by one mistake and cannot be made by one insight — they have, by construction, bought the average.
That is a perfectly rational choice, and for most people it is the right one. It is only irrational when it is made by accident: by someone who does the work of a stock picker, carries the cost and the time of a stock picker, and then holds enough names to guarantee an index result.
A number, with the reasoning attached
Fifteen to twenty-five, for most people who pick stocks. Enough to capture nearly all the statistical benefit, few enough that each position can be understood and followed, and large enough per holding that the work is worth doing.
Below ten you are making a concentrated bet, which is legitimate if it is chosen rather than drifted into, and if the businesses are ones you genuinely know. Above forty you are running an index fund with extra steps and a worse tax outcome — and at that point the honest move is to buy the index and spend the time on something else.
Durable, understandable, and unlikely to require you to act quickly — which is what concentration demands.
What to do with this on Monday
Count your holdings. Then, for each one, try to say in two sentences why you own it. The count you can defend that way is your real portfolio; the rest is residue from decisions you no longer remember making.
If the defensible number is twelve and you hold thirty-five, the problem is not diversification — the maths says you passed that point long ago. The problem is that twenty-three positions are doing nothing except making the twelve you believe in count for less.
Frequently asked
How many stocks do you need to be diversified?
About twenty captures roughly 93% of the risk reduction that diversification can offer, on the standard arithmetic. Ten gets you about 87%. Going from twenty to a hundred buys another five percentage points. The curve flattens far sooner than most people expect, which is why the argument for a hundred holdings has to rest on something other than risk.
Is ten stocks too few?
On the maths, ten captures about 87% of the available reduction — not far off twenty. The real problem with ten is not statistical, it is behavioural: each position is 10% of your money, which means one bad outcome is felt, and felt positions get sold at the wrong moment. The right number is the largest one you can hold through a bad year without acting.
Why doesn't adding more stocks keep helping?
Because shares move together. Diversification removes the risk specific to each company, but it cannot remove the risk they share — the market itself. Once the company-specific part is mostly gone, which happens quickly, additional holdings are diluting something that is already nearly gone.
Is a concentrated portfolio better?
It is higher variance in both directions, and it makes each decision matter more. Concentration is a reasonable choice for someone who genuinely knows a handful of businesses deeply and can sit still. It is a poor choice for someone who owns eight stocks because they never got round to the ninth — which describes most concentrated portfolios.