For those who can't (or don't want to) view the video clip, what follows is a transcript:
Hi, Fools. Ron Gross here, lead advisor for Million Dollar Portfolio, with my "120" on diversification.
So, what do we mean when we talk about diversification within a portfolio? I'm sure you've all heard the saying, "Don't put all your eggs in one basket." What that means is we're trying to own enough stocks so that we can spread the risk of ownership to a number of companies. That way, if one or two of our companies doesn't go as we planned, our portfolio won't get smacked over the head.
At Million Dollar Portfolio, we think owning between 15 and 50 stocks is just about right. Fifteen gets us the right amount of risk spread across ownership of companies, while 50 stocks or less will allow us to beat the benchmark that we're trying to beat -- in our case, the S&P 500 -- rather than just mimic it by owning 100 stocks, 200 stocks. We think owning less than 50 stocks is important, so we can be opportunistic.
Now, it's also important that we don't own too many stocks in any one industry. So we want to own at least 15, but we wouldn't want to own Costco
Costco is a Motley Fool Stock Advisor and Motley Fool Inside Value recommendation. Wal-Mart is also an Inside Value pick. The Fool owns shares of Costco and has a disclosure policy.