The 5 Stock Diversification Policy

Why Diversification (Of Assets) Makes No Sense

To individuals (at the very least)

Photo by Chris Liverani on Unsplash

In portfolio management, people often say that diversification is key to managing risk. While I do believe that (in some cases), for most retail (individual) investors, concentration in a handful of assets would make a lot more sense.

Here’s why.

Brokerage and clearing fees will devour your profits

For most individuals, the amount of free cash (cash after expenses) they have on hand to invest at any point is low. This is often due to loans they have to pay off monthly — student loans, car loans, mortgage loans, etc.

As such, should an individual with $10,000 in free cash invest into 10 different stocks, with $1000 invested in each? From where I come from, most brokerages charge a brokerage fee ranging from 0.18% to 0.28% of the trade value, or a minimum of $25, whichever is higher.

This implies that each of the 10 positions incur (25/1000) 2.5% in brokerage fees (since $25 > 0.28%*$1000), simply from buying the stock. Imagine if you made a 10% capital gain and wanted to sell the stock, you’d have to give up half your profits (2.5%+2.5%=5%) for all that hard work!