Advisors know that diversification should limit risk, but holding too many positions can dilute the benefit from having picked a big winner. In fact, many actively managed equity funds hold so many stocks that they become "index huggers," and simply mimic the performance of their benchmarks - at a higher cost to investors.
The answer for some planners is to use concentrated portfolios for some equity positions. Exactly what constitutes a concentrated portfolio is open to question. Some people would consider a fund holding 50 or fewer stocks concentrated. Certainly, a stock fund with fewer than 30 issues would qualify. According to Morningstar, 350 equity portfolios in its database recently held fewer than 30 stocks.
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