[[Start here]] → [[What works in stocks?|what works]] → diversity --- ![[inceoglu-diversity.png]] Constructing a portfolio is all about spreading your risk, without crippling your ability to generate returns. You want the perfect team, and if you plan on being fully invested, then ensuring it can weather storms and thrive in different environments is essential. Here are a few of the topics I'll be covering: - How many stocks should you own? - [[owning just five stocks significantly reduces portfolio volatility]] - [[owning 20 stocks reduces the chance of significant underperformance]] - own enough stocks to ensure you own some big winners (upside is skewed) - How should you weight your positions? - [[your effective number of positions is less than you think]] - market cap weighting fails to capture factor returns - equal weighting is “good enough” - risk weighting can outperform equal weighting - kelly weighting maximises returns - [[only risk 1% of your portfolio on each position]] - How many sectors should you own? - sectors perform at different, and unexpected times - defensive stocks provide ballast in hard times - cyclical stocks outperform in good times - Should you own international stocks? - home bias is a tax on investor ignorance - international exposure is possible in domestic stocks - international fund flows can put your domestic stocks at risk - How many categories of stocks should you own? - you can diversify across factors as well as sectors - Other than sector diversity, it's important to recognise [[there are six different categories of winning stocks]], each of which behaves differently. When constructing a portfolio, it's beneficial to consciously diversify across various categories. - Should you buy a portfolio all at once, or edge in over time? - Should you use leverage? --- Previous: [[expose to return drivers]]. Next: [[maintain your discipline]].