💡 Introduction
Diversification is one of the most misunderstood concepts in investing.
Some investors hold too few stocks, leaving their portfolio vulnerable to the performance of a single business.
Others hold so many that they unintentionally build a portfolio that behaves exactly like an index fund—but with more complexity and no added benefit.
Smart Alpha investing is about finding the right balance:
A portfolio that is diversified enough to be resilient —
but focused enough to deliver meaningful results.
1. The Goal of Diversification
Diversification is not about owning as many stocks as possible.
It’s about reducing risk from any single company impacting your total portfolio.
But once you reach a certain number of holdings, the added benefit of each new position decreases.
This is called the diversification curve:
The largest risk reduction happens in the first 10–20 stocks
Beyond ~25–30 stocks, the benefit becomes much smaller
Beyond ~45–60 stocks, the portfolio behaves like an index
In other words:
Diversification has diminishing returns.
2. When You Use ETFs, You’re Already Diversified
If your portfolio has broad ETFs (like S&P 500, Total Market, or International funds), you already own hundreds to thousands of companies inside those funds.
This means:
Your portfolio’s core diversification is already handled
The number of individual stocks you add does not need to be large
This is why Smart Alpha portfolios typically use:
ETFs as the structural foundation
Individual stocks as focused enhancements
3. A Practical Smart Alpha Guideline
Use this as your rule of thumb:
Portfolio Component | Number of Holdings | Purpose |
|---|---|---|
Core ETFs | 1–4 ETFs | Provides diversification and stability |
Individual Stocks | 5–15 positions | Focused exposure to high-quality companies |
Optional Satellite / Thematic Holdings | 0–3 ETFs or stocks | Only if aligned with conviction and research |
This leads to a balanced, intentional portfolio of about:
10–25 total holdings
including ETFs + individual stocks.
It is:
Diversified
Manageable
Easy to maintain
Aligned with conviction
4. What Happens When You Own Too Many Stocks
When a portfolio has 30+ individual stocks, it becomes:
Hard to research effectively
Hard to monitor consistently
Hard to size positions meaningfully
Positions become so small that good decisions don’t matter —
and bad decisions don’t hurt enough to learn from.
You end up with:
A portfolio that looks like an index fund — but behaves worse.
5. What Happens When You Own Too Few Stocks
With only 1–5 stocks, a portfolio becomes:
Concentrated
Volatile
Emotionally stressful
A single earnings report can swing total performance.
This approach requires:
Very high conviction
Very high research depth
Very high tolerance for volatility
Most investors don’t need to operate at that extreme.
Key Takeaway
You don’t need to own dozens of stocks.
You also don’t need to gamble on just a few.
The Smart Alpha approach:
ETFs provide the foundation
Individual stocks provide selective upside
Balance is the objective — not extremes
Target:
10–25 total holdings
with the majority of stability coming from ETFs.
Simplicity is not a disadvantage — it’s a disciplined edge.
⚡ Next in the Portfolio Strategy Series
The Role of Cash in a Long-Term Portfolio