The old advice not to put all your eggs in one basket is still one of the best in investing. A company can run into problems you could not foresee: an accounting scandal, a failed project, a new competitor or a change in regulation. If you own many companies, one such setback means little for the whole.
Two types of risk
Company-specific risk
This is the risk tied to the individual company: management, products, debt and competitors. It can largely be diversified away by owning many companies, because problems in one rarely hit the others at the same time.
Market risk
This is the risk that the whole market falls, for example in a financial crisis, a sharp rise in interest rates or a global downturn. It cannot be diversified away by owning more stocks in the same market. It can only be reduced by holding part of your wealth in other assets, or by investing less in shares.
How many stocks are enough?
Research and practical experience show that much of the company-specific risk disappears with around 15–30 stocks, as long as they are spread across industries. The benefit of each additional stock shrinks the more you have. Going from one to ten stocks reduces risk sharply. Going from 30 to 40 makes little difference.
But the number alone says little. Ten stocks in ten different industries diversify better than 20 stocks where half are oil companies.
Diversification on several levels
| Level | Example of good diversification | Typical mistake |
|---|---|---|
| Companies | 15–30 companies | One or two stocks make up more than half |
| Industries | Energy, finance, industry, consumer, technology and health | Many stocks in the same industry |
| Countries and regions | Norway, the Nordics, Europe, the US and emerging markets | Only Norwegian shares |
| Currency | Assets in several currencies | Everything in kroner |
| Time | Buy regularly over time | Everything invested at one point |
The Norwegian challenge
Oslo Børs is a relatively small exchange, heavily weighted towards a few sectors: energy, finance, seafood and shipping. Many of these companies are affected by the same factors, such as the oil price, interest rates and the krone. A portfolio of only Norwegian shares can therefore be more concentrated than the number of stocks suggests.
This is also why many Norwegian investors combine Norwegian shares with global index funds. The funds give broad diversification across countries and industries at low cost.
Correlation: how stocks move together
Correlation measures how much stocks move in step. Two oil companies are highly correlated: when the oil price falls, both fall. An oil company and a grocery company are less correlated. Diversification works best when the stocks in your portfolio do not react the same way to the same events.
Too much diversification?
You can diversify too much. If you own 80 individual stocks, it becomes hard to follow them all, and the portfolio will in practice behave like an index, but with higher costs. If you want diversification that broad, an index fund is often simpler and cheaper.
How AksjeNet helps
The portfolio analysis on AksjeNet shows how your portfolio is spread across sectors and individual stocks, where the concentration risk is greatest, and which positions are dragging it down. That makes it easier to see whether your diversification is as good as you think.