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What correlation means, how many stocks are enough, and the cost of over-diversification
Published by The Retail Trader · AUG 09, 2026 · Features
Many people's portfolios look diversified — ten or fifteen names. But if eight of them are in the same sector, that is one single bet that has been given eight names.
The purpose of diversification is that everything does not fall together. Having two different stocks achieves nothing if both depend on the same thing.
Stocks in the same sector often move together. So the real question is not how many names there are — the question is how many different reasons your money is riding on.
Research is fairly consistent that a large part of stock-specific risk is reduced by about 15-25 well-differentiated stocks. After that, each new name makes very little difference.
Beyond that, only one thing grows: your own workload. One person cannot study 40 companies properly, and what is not being studied is not diversification, it is ignorance.
All of these look 'diversified' and are not:
• Five mutual funds that hold almost the same kind of stocks — there is no point counting funds without checking overlap.
• Different stocks that are all on one theme — one story, many names.
• Equity only — diversification also happens at the asset class level, and that is what helps the most.
• Everything in one market — having the fate of the whole portfolio tied to a single economy is also a concentration.
A bitter truth: in a big crash almost everything falls together. The diversification that seems to work on calm days works very little on the one day when it is needed most.
So diversification alone is not risk management. Position size and cash level are needed alongside it.
With too many names, the result is that your portfolio starts moving like the index — but you are paying far more than the cost of the index, in effort as well as in tax.
In that situation the honest answer is often: if you want the same return as the index, just take the index. Diversification does not mean holding everything; it means that no single thing can finish you.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advisory. Rules, rates and mechanics change from time to time at the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.