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Diversification is a risk management technique that uses mixed assets in one portfolio. Instead of buying just one stock, you should buy multiple stocks to minimize risk. So if you have stocks from two companies, when one company has bad performance the other company might do better. You can put 50% of your money for a company and the other 50% for another company or 50% for stock and 50% for bond. You can also diversify stocks through various industries. When a person says “Don’t put your eggs in one basket”, he means do diversification.
Next step, how many stocks should be bought in a portfolio? According to theory, 20 stocks would be enough to get efficient portfolio. This assumes that the stocks came from various industry and company size. More stocks than 20 would not help much, so it is not effective having more than 20 stocks in a portfolio.
However, there is also opinion that did not consider diversification as something important. You can just have one stock but with minimum risk, if you are absolutely very sure that the stock is very good. Put your egg in one basket and watch carefully that basket.
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