The need for diversification is a hotly contested topic between market commentators and fund managers. Some refer to equations such as: "The number of stocks in a portfolio should be as close as possible to the square root of the portfolio value divided by 1000." While others will pluck a seemingly random number somewhere between 1 and 30 as the optimal number of stocks in a diversified portfolio.
But a number generated by an equation or a hard and fast rule will never work for every investor, instead I believe individuals should choose the number of stocks held by what will best allow outperformance as a whole in all market conditions. Of course, an individual's desire and ability to keep up-to-date with information about their companies is also a key consideration.
As a result, I've picked eight stocks below which together cover each major segment of the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). These quality businesses will not all perform well at the same time, rather there will be times where some outpace others, but the point here is to achieve long-term gains in all market conditions and make sure that an investor doesn't lose a huge chunk of their portfolio due to an unexpectedly poor result from one company, just ask investors overexposed to Forge Group Limited (ASX: FGE) until recently.
From the consumer sector I like JB Hi-Fi Limited (ASX: JBH), as the company recently surprised analysts with better-than-expected earnings growth and some good signs from the early roll out of the company's HOME concept stores. The shares are also down around 20% from their peak for no apparent reason.
In healthcare, blood group CSL Limited (ASX: CSL) dipped recently when it reported growing revenue and earnings (silly, right?), while transport group Aurizon Holdings Ltd (ASX: AZJ) has impressed with a 95% boost in dividend payout and just hit new all-time highs. In resources and energy, diversified miner BHP Billiton Limited (ASX: BHP) and gas and oil producer Woodside Petroleum Limited (ASX: WPL) have growth avenues and are also starting to impress with growing dividend yields. All four have healthy growth prospects in the years to come.
Rounding out the list are REA Group Limited (ASX: REA) to give some exposure to the internet, Twenty-First Century Fox Inc (ASX: FOX) for international and media revenue, and Australia and New Zealand Banking Group (ASX: ANZ) as the best looking bank out there at the moment.
Foolish takeaway
I currently hold shares in 13 companies, as that's a number I feel comfortable keeping on top of in terms of understanding the business and watching for new developments. I'd imagine investors with a few hours a week to research should be able to handle eight companies, though the minimum holding value should probably be over $2000 in order to minimise transaction costs. The companies listed above are some of the best in the ASX 100 and ASX 200 right now and represent reasonable value for a long-term investment.
