A long list of holdings is no more 'portfolio diversification' than a huge pile of stones is Chartres Cathedral. - Charles. D. Ellis

Intelligent Diversification

Portfolio diversification is essential to reducing risk, but only up to a point. As the chart below1 demonstrates, 95% of non-market risk (deviation from the index) is eliminated by a portfolio holding approximately 20 companies, spread amongst multiple industry groups. Adding substantially more companies increases frictional costs and ultimately dilutes the benefits of allocating capital to our best and most reasoned ideas.

1James Montier, Value Investing Tools and Techniques for Intelligent Investment (London: Wiley Press, 2009), 42