Although this number is substantially larger than what most investors might consider to be an investable universe of stocks, it’s important to use as a baseline to define “the market.” Because we don’t want to take on unnecessary risks of buying illiquid companies or ones without a viable market in which they trade, only stocks that trade freely and meet reasonable standards for liquidity are deemed investable.With these filters, the portfolios that we build for our clients currently contain around 13,000 stocks.This is a substantially larger number than is contained in the MSCI All Country World Index Investable Market Index (MSCI ACWI IMI).This widely used global index which is often the main benchmark to globally allocated portfolios, only contains between 8,000 and 9,000 stocks.2 It’s through our additional screening and fund searches that we’re able to implement with tools that allow us to hit the higher mark. So, why do we need to be so diversified? Some investing textbooks claim that a portfolio of ten to fifteen stocks is sufficient to be adequately diversified. Under that assumption, one of the most widely quoted stock indexes, the Dow Jones Industrial Average, should be more than adequately diversified at thirty stocks. Shouldn’t 9,000 be enough? As with most questions in economics, the answer is simply,“it depends.”We know through empirical economic research and mathematical simulations that the number of stocks held in a portfolio dramatically impacts the likelihood that a portfolio will perform as designed and expected. It’s long been understood that if you’re willing to accept a much higher likelihood of underperformance in the hopes of being like the lucky lotto winner holding the one winning ticket, then you should concentrate your holdings in a few stocks. If not, by diversifying your portfolio to its fullest extent you reduce the likelihood of a negative surprise as you experience returns over time.As with many long-standing, commonly held rules of thumb, this one may be on the chopping block. In a recent study by Dimensional Fund Advisors, portfolios with various levels of diversification were analyzed to see how an increase in the number of stocks held in portfolios impacted their likelihood of outperformance.3 As you can INVESTMENT UPDATE continued from page 1 2 Source: Dimensional Fund Advisors. The estimated probabilities are analytically derived by assuming that continuously compounded returns are normally distributed with constant parameters.The parameters are estimated from the historical returns of Dimensional US Adjusted Large Cap Equity Index and Russell 1000 Index, as well as simulated portfolios with different diversification levels, over the sample period from July 1979 to June 2016.The simulated portfolios with different diversification levels are formed by bootstrapping stocks from the large cap universe—the greater the number of draws, the more diversified the resulting portfolios are in terms of the average number of unique names.The diversification levels shown, 50, 200, and 500 names on average, correspond to 56, 294, and 1,161 draws, respectively.All simulated portfolios maintain the same tilts toward the size, value and profitability premiums as the Dimensional US Adjusted Large Cap Equity Index.The projections or other information generated by bootstrapped samples regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results will vary with each use and over time. Please see Appendix for more information regarding assumptions and methodology and a description of the Dimensional index shown. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. 50 Names 200 Names 500 Names Adj. Index 1,000 Names 1 Year 5 Year 10 Year 56% 63% 67% 71% 50 Names 200 Names 500 Names Adj. Index 1,000 Names 64% 76% 84% 90% 50 Names 200 Names 500 Names Adj. Index 1,000 Names 69% 85% 92% 96% Estimated Probability of Outperforming the Russell 1000 Index for Simulated US Large Cap Portfolios with Different Diversification Levels and Dimensional US Adjusted Large Cap Equity Index (Adj. Index) over Various Investment Horizons Assuming Their Continuously Compounded Returns are Normally Distributed with Constant Parameters 1995 1998 2001 2004 2007 2010 2013 2016 40,000 30,000 20,000 10,000 0 Global US Number of Publicly Listed Companies Source: Bloomberg. COMPANIES 2 https://www.msci.com/documents/10199/b93d88ef-632f-4bdb-9069-d7c5aecd9d6d 3 Dimensional,“How Diversification Impacts the Reliability of Outcomes,” January 2017.Available at this link, or at dfaus.com