The point is you might be better off owning the 30 best stocks for your portfolio (among a variety of industries) than own 30 of the best stocks plus 970 non-optimal stocks that pull down your portfolio performance. In other words, the increased benefits from owning 970 additional stocks would be small compared to the expected loss of return.
Most investors have experienced the poor results of over diversification. This is because many institutional vehicles (i.e. diversified mutual funds, pension funds, equity index funds, ETFs, etc.) are over diversified and therefore lack the ability to concentrate on quality instead of quantity.
The optimum portfolio diversification is to own a number of individual investments large enough to nearly eliminate unsystematic risk but small enough to concentrate on the best opportunities.
This article was republished with permission from Arbor Investment Planner.