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What is the rule of 42?

The so-called Rule of 42 is one example of a philosophy that focuses on a large distribution of holdings, calling for a portfolio to include at least 42 choices while owning only a small amount of most of those choices.

realized1031.com - What Is the Rule of 42? - Realized 1031

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When crafting and managing your investment portfolio, one of the fundamental goals is to maintain a diverse array of components. A varied selection of holdings is typically designed to seek growth and manage volatility. Most likely, you have some professional help to guide you in this journey, but you also probably influence the process in large and small ways and educate yourself on current thinking about investing. Of course, there are many approaches to investing, and experts don’t necessarily agree on the optimal method of enhancing returns and managing risk. For example, some emphasize the importance of spreading your investments across industries and sectors, while others may prefer a certain number of different selections. The so-called Rule of 42 is one example of a philosophy that focuses on a large distribution of holdings, calling for a portfolio to include at least 42 choices while owning only a small amount of most of those choices.

How the Rule of 42 Works

Proponents of this approach posit that the old adage about not putting all your eggs in one basket is wise advice, which is why they suggest that an investor should have a wide array of investments, with most making up between two and three percent of their investment portfolio. By that formula, with at least 42 stocks at two percent of the holdings, that is 84 percent, leaving sixteen percent for weighting with some preferred investment options. The theory is that with that much variety, volatility with any small number of stocks won't have a significant adverse effect on the portfolio's overall performance. Further, this approach recommends careful distribution through different sectors and equity types to pursue even performance under changing market conditions.

Does the Specific Number Matter?

The answer to whether any specific number of securities is the best depends on whom you ask. Some say that 30 is enough, including Liz Young, head of investment strategy at SoFi, who draws the line at a minimum of 20. But others look for much higher numbers, including one study by Roxbury Capital that concluded that anything less than 60 stocks was risky. The goal is to have enough distribution between market sectors that your components aren’t all subject to the same market forces.

Managing Downside and Fostering Upside

Investment advisers typically suggest that a good approach, regardless of a specific number of elements, is creating a portfolio that contains uncorrelated assets. When the same external factors don't influence the price of two assets, they are uncorrelated. That way, the average volatility of each asset is lower than the volatility of the individual holding. Suppose each piece has minimal ability to affect the overall portfolio's value. In that case, the potential downside can be managed while the individual elements can enjoy their particular growth potential opportunity. A portfolio that includes a balance of stocks in various industries and across growth and size categories, supplemented by bonds, real estate, and other investment instruments, may be balanced without reaching a specific numeric count.

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Can ribs grow back?

Fractures to major bones often heal slowly or incompletely, especially in older people, and large bone injuries do not repair naturally. By comparison, rib bones show an unusual capacity to regrow and repair themselves even when a large portion is damaged.

elifesciences.org - Ribs hold the key to better bone healing | eLife Science Digests

Special hybrid cells are essential for large-scale repair in the rib. These cells (yellow) co-express genes normally associated with cartilage (green) and bone (red). Image credit: Kuwahara et al. (CC BY 4.0) Fractures to major bones often heal slowly or incompletely, especially in older people, and large bone injuries do not repair naturally. By comparison, rib bones show an unusual capacity to regrow and repair themselves even when a large portion is damaged. Previous research suggests that the connective tissue around the ribs helps to support and co-ordinate bone healing. Yet it is currently not clear why ribs have a greater capacity to repair these large injuries compared to other bones. Kuwahara et al. have now examined bone repair by studying how ribs heal in mice. The experiments show that around 6% of the connective tissue cells are critical for large-scale repair. Kuwahara et al. named these cells messenger cells. These cells detect the presence of a signal molecule called Hedgehog (Hh), however, if these cells lose the ability to respond to the Hh molecules, the ribs do not heal properly. Further examination revealed that these messenger cells co-ordinate repair by encouraging other cells to build a special kind of bone-healing tissue with hybrid properties of both cartilage and bone. Further research could now examine how messenger cells co-ordinate healing and if their properties could be adapted to help repair other bones. Ultimately, understanding how messenger cells work may even provide insights into new ways to repair and regenerate other tissues and organs too.

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