The Goldilocks Portfolio: How many stocks is ‘Just Right’?

Readers will be familiar with the story of Goldilocks, the curious girl who wanders into the house of three bears and eats their porridge. One bowl is too hot, one bowl is too cold, and one bowl is just right. The story serves as a kid-friendly illustration of the ‘happy medium’ principle — the idea that the best outcome lies in the balance between extremes. The principle is relevant in many fields, including investing, and particularly in the context of portfolio diversification. Investors often wonder how many stocks are ‘too many’ (’too hot’) or ‘too few’ (’too cold’)?

Various gurus offer advice. For example, Peter Lynch argues that ‘the average person can concentrate on a few good companies.’ He cautioned that ‘by owning too many stocks, you lose this advantage of concentration.’ It’s solid advice, but it still leaves lingering questions: what exactly counts as ‘concentrated,’ and when does ‘too many’ become a problem? We’re going to tackle this question with a particular focus on factor investing strategies. These strategies can help private investors beat the market, but only when the portfolio size is carefully managed…

This portfolio is too big

A large body of research suggests that factor investing strategies do outperform...