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Is investing in 20-25 stocks really the best form of diversification?

Yes. You can be well diversified even with less stocks. Owning hundreds of stocks will not protect you against systemic risk. If there is a recession and panic, everybody sells everything, then it really doesn’t matter how many stocks you own. And if you want to be protected against a failure of one stocks vs. the others, just make sure you pay attention to the proper stock correlation so your positions can hedge each other. That means, you need to look for companies which act in opposite way, for example, if oil companies go down, which companies are correlated in the opposite manner and go up? And then of course, you want to pick good businesses and know them and monitor them. If you do this right (and bad news is that very few know what to do in lieu of blatantly buying everything and thinking that they are diversified) then you can be literally diversified with only 2 stocks. But, that would mean to learn a lot about hedging.

I myself own in one portfolio only about 10 companies. One went bankrupt (it was a speculative oil company and I stupidly let it go instead of ditching it as soon as I saw troubles), yet my portfolio is significantly up.

William O’Neil wrote about diversification I think back in 2006-ish (I really no longer remember) and concluded that owning many companies not only will not protect you but it will also be difficult to monitor them and watch them that they still meet your criteria. In my IRA account I have a lot more companies and it is really hard to follow them all. So do not bury yourself in a huge portfolio and get lost in it. Pick only a few and familiarize yourself with them and know them in and out as if they were your businesses.

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