How Many Stocks Should Be In An Investor’s Portfolio?
Question: How many different company’s stocks should be in an investor’s portfolio? There are many differing opinions on this.
Only Buy Stocks You Have Enough Time To Research
To build a solid, and rewarding, portfolio an investor should keep in mind that “each” company’s stock that they purchase should be monitored periodically for any changes. Accordingly, the investor should only buy a number of stocks that they have the time to research thoroughly. An investment quote by the famous investor Peter Lynch advises: “Hold no more stocks than you can remain informed on.”
An investor can ‘only” closely analyze and follow so many company’s stocks at one time! Bottom line: A stockholder needs to have full knowledge of “each” one of their companies An investor should not bite off more than they can handle. This could prove very risky in the long run!
Choose Different Industries To Invest In
The investor should strive for diversification. Most investors are familiar with the slogan, “Don’t put all of your eggs in one basket.” An example of diversification would be when an investor chooses different industries to invest in. An investor could also achieve diversification by choosing companies with different market caps or sectors.
For example, an investor would not be diversified if their portfolio consisted of all bank stocks in the financial industry. If the banking industry suffered, an investor would have much to lose! An investor does not want too much exposure to just one industry. It is to the investor’s advantage to have an “assortment” of different companies in their stock portfolios. Diversifying in this way helps an investor to reduce their overall risks.
Try To Choose Outstanding Companies
Warren Buffett, considered the greatest investor of all time, has suggested: “Choose a few (ten to fifteen) outstanding companies that have achieved above-average returns in the past” and ” have a high probability of continuing their past strong performance into the future.” Some investors may find that sinking a large % of their income into “as little” as 10 well-performing companies in their portfolios fits this bill.
It is important to note, that in an investor’s efforts to diversify they are in no way limiting their risks if they buy too many companies in different industries. Why? This would be classified as: “Over-diversification.”
Is One Of Your Companies Outperforming The Others?
If you should see one of your companies, however, outperforming the others, and you have done diligent research on this company, and see that the fundamentals are also improving, it would make sense to try to invest a “larger” percentage of your money into this one company. Once, you have built your portfolio and carefully chosen the number of companies to invest in you need to have the necessary courage and conviction to hold onto them!
In conclusion, a stockholder needs to allow themselves enough time to research “each” individual company that they purchase. Also monitoring their stocks, periodically, will alert them to any important changes in their investments. It is also important for stockholders to diversify their portfolios. However, be careful not to “over-diversify” and invest in too many different companies at one time! This could backfire on an investor and prove risky! It can be risky and difficult to research a ton of different stocks!
Hi Linda, I have always read that 25 stocks spread among different sectors and industries is optimal for diversification. Adding more doesn’t decrease volatility all that much based on academic research. I don’t exactly follow this advice since I hold more stocks in my personal portfolio. Tom
Hi Tom, I, personally think the number of stocks an individual investor should purchase, also, in an attempt to be adequately diversified, should fit into their investment budget. ( Although mutual funds are not for me…this may be the reason why so many invest in mutual funds for an inexpensive way to stay diversified). Also, if they own a ton of different companies, have they allowed themselves enough time to monitor “each and every company” they own?
I, personally, do extensive research on each one of my companies…studying the financial statements, management, quarterly and annual reports of each one…before I buy. This is very time consuming and, at present, my diversified portfolio keeps me very busy.