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Rob Carrick.
Rob Carrick.
(Brigitte Bouvier For The Globe and Mail)

Worried about a correction? Buy more stocks

Worried about a stock market correction? You may need more stocks to lower the risk level in your portfolio, not fewer.

Classic thinking on diversification suggests that as few as 15 to 20 different stocks will provide effective diversification. But a recent note from the research department at PWL Capital quotes some work by a pair of finance professors that shows optimum diversification in the Canadian market requires up to 70 equally weighted securities. If that’s the case, “then it stands to reason that a global portfolio would require thousands of stocks to achieve its diversification potential, considering there are about 50 developed and emerging countries in the investable world,” PWL research chief Raymond Kerzérho wrote.