If you buy a poor
performing stock, you can offset the damage by
having better performers in other sectors. Diversification
is about reducing investment risk by not putting
all your eggs in one basket. The size of companies
in the FTSE-100 index, when measured by market
capitalization (share price × number of
shares in issue), makes them less risky than most.
Be warned, however, that the safety net of size
is no longer as strong as it was.
The City accepts that about 14 stocks will give
you the maximum benefit from diversification and
anything more may reduce effectiveness. Once you
have become an old hand at value investing, you
will see that it is better to pick five good stocks
and put all your money into these, than to go
for 10 stocks, of which some are mediocre, and
maybe one or two bad.
