| How efficient is your portfolio's diversification?
Since the "Market" is made up of all the stocks, every
individual stock has some correlation with the market. The more stocks
you own, the more your results will even out and come closer to the
market returns.
Over the last 30 years, the percentage of
individual stock volatility that is explained by the "Market"
has fallen by more than one half. The old rule of thumb that owning 30
stocks gives 95% of the benefit of full diversification is no longer
true.
You can think of risk levels as the
readings on a thermometer where 100 is the risk of a fully-diversified
portfolio of Large-cap Stocks. As you add more stocks, your risk levels
go down, but they can never go below the risk of the market. Enter the number of individual stocks you own in the
"'Number of Stocks" boxes below to see estimates of your
Diversification. Clicking another box triggers the calculation.
This calculator assumes your holdings are
evenly balanced among the stocks and that you are diversified across
industries. If you are concentrated in certain industries, your relative
risk levels will be considerably higher. For more
information, click the popups icons on this
page.
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