The Diversification Dilemma: How Many Stocks Are Enough for Irish Investors?

Irish investors often shy away from exchange-traded funds (ETFs) due to unfavorable tax treatment, opting instead for direct investment in individual stocks. However, achieving true portfolio diversification through individual stock selection may be far more challenging – and require significantly more capital – than many realize. Recent research suggests that the commonly held belief that 30-40 stocks are sufficient to mitigate company-specific risk may be a substantial underestimate.

The Limits of Traditional Diversification

For decades, financial advisors have recommended a portfolio of 30 to 40 stocks as a reasonable approach to reducing risk. This rule of thumb, originating in research from the 1980s, aimed to eliminate exposure to the idiosyncratic risks associated with individual companies. However, a latest analysis of over 87,000 stocks spanning four decades, detailed in the report “Fomo in Equity Markets?”, challenges this long-standing assumption.

The research indicates that even a portfolio of 100 stocks doesn’t entirely eliminate the impact of luck. An “unlucky” selection of stocks can underperform a more fortunate one by several percentage points annually. This highlights the inherent difficulty in consistently picking winning stocks.

The True Cost of Diversification: Hundreds of Stocks?

So, how many stocks are enough to achieve meaningful diversification? The authors of “Fomo in Equity Markets?” suggest that true diversification may necessitate holding hundreds – potentially as many as 750 – stocks to closely mirror the performance of the overall market. This is a significant increase from the traditional recommendation and presents a practical challenge for most individual investors.

The Power of a Few: Market Gains and “Fomo Risk”

The need for such extensive diversification stems from the concentrated nature of market gains. The research reveals that a remarkably small percentage of companies drive the majority of wealth creation. Specifically, just 2.1% of companies are responsible for all net wealth generated, while only 30 companies – including giants like Apple and Microsoft – account for a quarter of all gains.

Conversely, a substantial portion of stocks deliver lackluster returns. 59% of stocks fail to outperform Treasury bills, meaning investors could achieve similar results with a risk-free investment.

This phenomenon leads to what the authors term “Fomo risk” – the fear of missing out. Smaller portfolios are more likely to miss out on the exceptional gains generated by these market-leading companies. Investors avoiding funds to minimize tax implications face a trade-off: a limited portfolio may miss the market’s biggest winners, while building a portfolio of several hundred stocks is a daunting task for even the most dedicated investor.

Ireland’s ETF Landscape

Ireland has established itself as a leading domicile for ETFs in Europe, with the first ETF being established there 25 years ago. Irish UCITS ETFs are sold globally, throughout Europe, Asia, the Middle East, and Latin America. The Irish fund market has experienced double-digit growth, driven by strong momentum in equity ETFs, with assets reaching US$1,456.5 billion across 1,086 funds and sub-funds as of June 2025. Equity ETFs now represent the largest product category for Irish-domiciled funds.

Central Bank Review of ETF Trading Arrangements

In 2023, the Central Bank of Ireland undertook a review of the primary and secondary market trading arrangements of Irish authorised ETFs. The Central Bank highlighted key findings and expectations for Fund Management Companies.

Key Takeaways

• Traditional diversification strategies (30-40 stocks) may be insufficient to capture market gains.
• True diversification could require holding hundreds of stocks, potentially up to 750.
• Market returns are heavily concentrated in a small number of companies.
• Investors avoiding ETFs due to tax concerns face a trade-off between tax efficiency and diversification.
• Ireland is a leading European domicile for ETFs, experiencing significant growth in the sector.