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Diversification is often a hedge for ignorance

Investors are often advised to diversify their stock portfolios to minimize risk. But IBD research shows that it’s actually less risky and more rewarding to own just several carefully chosen stocks.

“The best results are achieved through concentration, by putting your eggs in a few baskets that you know well and watching them very carefully,” IBD founder and Chairman William J. O’Neil wrote in “How To Make Money In Stocks.”

“Keep things manageable. The more stocks you own, the harder it is to keep track of all of them,” O’Neil wrote.

He says investors should conduct thorough research and choose a limited number of stocks that can be followed easily. This involves first creating a watch list focused on industry-leading companies with top-notch fundamentals.

People with $20,000 to $200,000 to invest should limit their holdings to four or five stocks. Those with $5,000 to $20,000 should consider buying at most three stocks, and those with around $3,000 should limit their holdings to two stocks, O’Neil writes.

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