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Thesecontrastwithcountercyclical,ordefensive,sectors,whichgenerallyhavealowbeta。

TakehouseholdgoodsproducerssuchasReckittBenkiser。

Wemighthuntforcheaperalternativesinadownturn,butwedontgiveupsoap,washingpowderandtoothpasteentirely。

Thesamelogicappliestotobacco,utilityanddrugfirms。

Becausethesetendtohaveloyalconsumers,cashflowstendtobestable,meaningtheycanpaydecentdividends。

Fansofdiversificationsuggestthatbyowningaportfoliocontainingamixofcyclicalandcounter-cyclicalstocks,youcanhopetoearndecentreturnswhileironingoutthemarketsbiggestwrinkles。

Butwhatstheoptimumnumberofstocks?

Themagicnumber

JamesMontieratGMOreckonsatypicalfundmanagerholds100to160stocks–whichismadness。

Thetradingcostsofsettingupsuchalargeportfolioarehuge;andthetimeneededtomanageitcouldbebetterspentelsewhere。

Byholdingjusttwostocks,saysMontier,aninvestorcancutnon-marketrisk(stock-specificrisk,ratherthantheriskofacollapseinwhichallstocksaretrashed)bynearlyhalf。

Buy32and96%ofthatriskiseliminated。

Sobyholding30-40sharesyoullgetthevastmajorityofanydiversificationbenefits。

AsWarrenBuffettputsit,widediversificationisonlyusedwheninvestorsdontunderstandwhattheyaredoing。

Whattodo

Evenbuildinga30-40strongportfolioisahassleformanyinvestors。

Tradingchargeswillwipeoutachunkofanygainsunlessyoubuyadecentamountofeachshare。

Somanywouldbebetteroffusingcheapexchange-tradedfunds(ETFs)totrackthebitsofthemarkettheylike,ratherthantakinganexpensiveandtime-consumingbuildyourownapproach。

Aboveall,avoidpayinganexpensivefundmanagertobuytoomanystocksonyourbehalf。

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