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The ideal portfolio

In our award-winning Ideal Portfolio series, Investors Chronicle provides the guiding principles to ensure the shares you buy provide a rock-solid foundation for your portfolio
The ideal portfolio

Investors don't need millions of pounds, access to hedge funds or years of knowledge and expensive qualifications to make more money. Many could greatly increase their returns simply by buying more shares. Holding too few shares is the single biggest mistake most investors make. The one factor that differentiated older, richer and more sophisticated investors was that they increased returns by holding more shares, a behavioural investment study by Goetzmann and Kumar of over 60,000 US stock holding households found. The data showed over 60 per cent of households held three shares or fewer, greatly increasing their risks.

Diversify, diversify, diversify

How many shares should investors hold in their portfolio? The simple answer is 15. As investors increase shares from one to 15, each additional share greatly reduces the risk of underperforming the market. But after 15 shares the reduction in risk becomes so small that it is questionable whether it outweighs all the extra effort and research going into the investment case. Returns are also diluted, such that even if the share turns out to be a ten-bagger the benefit to the portfolio will be hardly worth the effort. Risk Reduction and Portfolio Diversification: An Analytical Solution by Edwin Elton and Martin Gruber (Journal of Business, 1977) show the benefits (see chart, below).

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