Too Much of One Type of Investment Might Not Be a Good Thing When it Comes to Your Portfolio.
Your tolerance for risk mainly depends on your financial situation, goals and personal comfort level. In our view, a portfolio that’s concentrated in one or a few securities is not a risk worth taking.
Stocks
If history is a guide, we believe a well-diversified portfolio of quality equity investments, held for a long period of time, has the potential to compensate you for the additional risk that stocks represent. Diversification doesn’t guarantee a profit or protect against loss, but we believe it can help you weather market volatility. If individual stocks will constitute the majority of your portfolio’s equity weighting, in general, we believe you should own at least 25 stocks in a variety of industries.
Bonds
If all your fixed-income money is in one bond or a few bonds in the same sector, you could be taking on more risk. Even investment-grade bonds can have their credit rating reduced, resulting in a value drop. If you hold bonds to maturity, you’ll see your principal returned, barring default. But, while defaults aren’t common, they can happen. If you want to own individual bonds, strive to own 10–20 investment-grade quality fixed-income securities — at least 85% in A-rated or higher — with various maturity dates. It’s also important to own bonds from different corporate industries, municipal sectors and government agencies for proper diversification.
Real-world Returns
Many people think if they have a lot invested in one “right” stock, they can make progress toward their goals. But no one knows what that one right stock will be. Even with 25 stocks, the range of returns may be quite wide. The more stocks you own, the narrower the range of potential returns. With a well-diversified portfolio, your returns may be closer to what you expect. Assume the market returns 10% per year. The following table shows what the expected range of returns for several portfolios would be about 95% of the time.
| Portfolio Size | If Held One Year | If Held Five Years |
| 1 stock | -78% to 98% | -28% to 49% |
| 15 stocks | -1% to 21% | 5% to 15% |
| 30 stocks | 2% to 18% | 6% to 14% |
| Source: Edward Jones. Based on tracking error reported in Winter 2000 Journal of Investing, Ronald Surz & Mitchell Price. Past performance does not guarantee future results. Rounded to the nearest whole number. Assumes proper diversification by industry/sector. | ||
In this example, if you invest $100,000 in one stock, there is a 95% chance your return will fall somewhere between losing $78,000 and making $98,000. Of course, this assumes that the stock market return is 10%. To narrow the range, you would have to hold the stock portfolio for a longer period of time — say, five years.
With long-term financial goals, such as retirement, we believe putting too much money into one or a few securities is taking too great a risk. Contact your financial advisor about ways to better diversify your portfolio and help reduce your investment risk.
Alan F. Skrainka, CFA
Chief Market Strategist
*The monthly automatic sale of your securities may produce a taxable event. Please consult your tax advisor regarding the effect this program may have on your taxes. Systematically selling investments should be reviewed regularly with your financial advisor. In extended periods of declining stock prices, it is possible to deplete your stock position. Not available for all stocks. Edward Jones, its employees and financial advisors do not offer tax or legal advice. Please consult with a qualified tax or legal advisor about your particular situation.
