Using backtests on a comprehensive global equity dataset covering 47 countries over 1985–2023, we analyze how portfolio performance varies with the number of stocks. Two main findings stand out. First, contrary to commonly cited evidence, portfolios of 30–40 stocks are not sufficient to fully diversify idiosyncratic risk.
Second, we identify a novel dimension of concentration risk, which we refer to as FOMO (fear of missing out). When portfolios are more concentrated, stock selection becomes critical for performance, and investors face a wide dispersion in outcomes depending on which stocks are included. Investors may thus experience regret about their portfolio choice ex post when other choices would have yielded better performance. This effect is economically large and persists even for portfolios with hundreds of stocks.
in Externe publicatie door Andreas Brøgger, Joren Koëter, and Mathijs van Dijk