Risk & position sizing
What is sector diversification and how many stocks do I need to eliminate idiosyncratic risk?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
Sector diversification spreads investments across multiple industries to reduce exposure to any single sector's downturn, with academic research suggesting roughly 20-30 stocks across sectors substantially reduces idiosyncratic, company-specific risk.
How it works
Beyond that range, additional holdings produce diminishing diversification benefits for eliminating individual-stock risk, though systemic market-wide risk remains regardless of how many stocks are held.
An example
An investor holding 25 stocks across technology, healthcare, energy, and consumer sectors is less exposed to one company's bad earnings report than someone holding just five stocks.
Risk & limitations
Diversification reduces but never eliminates risk entirely, and broad market downturns can still affect a well-diversified portfolio of individual stocks across sectors.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.