How to Diversify a Stock Portfolio (Beyond "Just Buy More Stocks")
Diversifying a portfolio means reducing risk without giving up return. But diversifying poorly — adding highly correlated assets — doesn't actually reduce risk, it just adds complexity.
Correlation is the key
Two stocks that always move in the same direction (correlation near +1) don't diversify anything: when one drops, so does the other. Real diversification comes from combining assets with low or negative correlation.
OjoAlTicker's ticker pages show each stock's correlation with the S&P 500: an asset with 0.3 correlation adds more diversification than one with 0.9, even with similar returns.
Diversifying by GICS sector
The S&P 500 is split into 11 GICS sectors. Combining assets from different sectors reduces the correlation between them:
- Technology + Consumer Staples: consumer staples are defensive (everyday products), tech is more cyclical — a good balance.
- Energy + Utilities: these sometimes move opposite to broader markets.
- Financials + Health Care: distinct dynamics with low correlation to each other.
How many assets do you need?
Most diversifiable risk is eliminated with 8-15 well-chosen assets. Beyond that point, additional diversification benefit is marginal. The key isn't the number, it's the correlation between them.
The efficient frontier as a tool
The optimizer finds the weights that maximize diversification (minimum volatility) or the return/risk trade-off (maximum Sharpe), using Monte Carlo simulation.
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