One recurring question most investors have, especially at the beginning of their investing journey, is how many stocks are ideal for their stock holdings. This is especially the case if such an investor has the money to increase their stock portfolio. It also occurs in situations where a potential investor is looking to take advantage of the benefits of a diversified stock portfolio. Thus, they work to strike a balance between having too few stocks and too many stocks.
The first thing you have to realize is that there is no one-size-fits-all when it comes to investments. For example, how many stocks you choose to buy depends on certain factors such as your personal data –how much you have, your risk appetite, how much you can dedicate to your investments, and the market risks in that industry, investment time horizon, and so on. In addition, it is not just enough to buy assets of every asset class, including mutual funds, index funds, etc.
So, are you wondering “how many stocks should I own?” We’ve got the answers for you. In this article, we bring you suggestions on what to take cognizance of when deciding on how many stocks you should buy. Ready? Let’s dive in!
What Stage are You in the Stock Market?
When looking to create a diversified portfolio, the particular stage you are in in your investment journey is crucial. At every point, you should have some individual stocks that will make up your portfolio.
Below are the different investment stages and how you should be prioritizing your investments in each case.
Starting Out Stage
At the early stages, you may be unable to diversify into different sectors and companies fully. Ideally, at this point, you should be looking at having between ten to a dozen stocks. Even though you may not have a lot of purchasing power, it is important to attempt diversification across different sectors. Thus, if you have some stocks in the financial sector, such as bank stocks, you may also want to check out stocks in the entertainment or hospitality sector. Of course, the stocks in your portfolio at this stage, or even at any stage at all, may not cover the entire market, but they should have a good spread.
The Growth Stage
At this stage, you are looking to grow your investments. Hence, you are not focused on making huge returns. It is typical for investors at this point to be reinvesting all of their returns into reinvesting. Thus, you should be actively looking to grow the number of stocks that you have. It is permissible for your number of stocks to peak around 30 to 35 at this stage. Do bear in mind that this stage may well last a couple of years. Thus, you could be holding this position for anything from 3 to 5 years.
Living on Your Dividend Stage
This is the final stage of the investment process, living on your dividends. Here, you have successfully built your portfolio over the years and are now looking to reap the rewards from it. You may have had some of the stocks here for many years, so their position would have solidified. More so, the interest on the stocks must have compounded, producing income that is anything but negligible. Your stocks should be around 50 at this point. They should be spread out in such a way that you effectively manage risks as they come.
How Many Stocks Should I Own? Top Tips
When it comes to how many stocks you should buy, certain tips are indispensable. Of course, this is outside of the discussion of the stage you are in in your investment journey. Consider these to be tips that will come in handy regardless of what kind of investor you choose to be in the future. Here goes:
Insist on Quality
Many investors disregard this crucial point and find themselves in trouble somewhere along the line. Always make sure that you put quality over quantity. It is better to buy just a few stocks from several companies than to buy many stocks that will cost you money in the future. This means then that you have to consider the company you seek to invest in carefully. This is because the value of the stuck is, in most cases, directly linked to the reputation of the company. However, even beyond that, a company’s antecedents will let you know what to expect. Thankfully, you can find data on virtually every company these days in the public domain. Always do your due diligence.
Weigh Your Risk Tolerance
The stock market is notoriously volatile. Stocks are often affected by market forces that may be well beyond your control. When the market shakes, the stocks in a portfolio could either increase their value or shrink. How does this concern your portfolio size? It is simple, if you have a small risk tolerance threshold, you should own more stocks, but if the converse is the case, you will be fine holding just a few positions. In other words, how comfortable you are with market volatility will inform the spread of your stock.
You must understand that investing in stocks is not for the faint of heart. It requires commitment in every form. Thus, you should be willing to put in the time needed to learn about the market. This will help you do effective investment analysis from time to time. You will then be familiar with investment terms such as systematic risk, company risk, etc. It would be best if you also were willing to invest money into the venture. You cannot make returns on stocks if you are not willing to lose money to do so. Thus, part of being an active investor is understanding that you could lose all that you invest. When you are comfortable with that, then you are good to go.
Owning a Diversified Portfolio
A crucial term in the discussion about how many stocks you should own is diversification. Diversification works like the advice not to put all of your eggs into one basket. Here, the eggs will refer to your stocks, and the basket will be the company or industry you are investing in. Thus, in diversification, you do not buy just the stocks of one company. Typically, you will have different asset classes from different companies or even different industries in your portfolio.
Generally, there are pros and cons on both sides of the divide (It’ll interest you to know that the lion of Omaha himself, Warren Buffett, doesn’t support diversification). To a large extent, the nature of the stocks you have will play a huge role. For instance, a growth stock like an Apple stock will react differently in the market than a defensive stock.
Diversification affects your company risk and market risk. Company risk refers to the risks associated with the particular company you invest in. For instance, activities of the shareholders, etc. Market risk refers to the risks all the stocks in the market are exposed to and is not related just to that particular stock you own. You should understand that the more stock you own, the less your company risk becomes. The market risk invariably stays the same all around.
In all, it is important to note that the specific number of stocks is not as important as how and where you buy the stocks from. This is because you could have several stocks and still lose money because they are not spread across the market fully. Thus, making moves to place additional stocks in your portfolio depends on what you know about the industry in question and the possibility of growth. As a rule of thumb, though, you should be looking at between three dozen or so stocks. That is, between thirty to fifty stocks in your portfolios.
Pros of Diversification
Before you make the investment decision of diversifying your stock portfolio, here are some of the advantages of doing so:
Diversification is one sure way of mitigating risks in the stock market. It is common knowledge that the stock market is notoriously volatile. Hence, you may be unable to predict all the turns it could take. Thus, apart from your investment dexterity, other factors could influence how large your market returns are. Spreading out your investments is a way to hedge the risks of the volatile stock market. It is almost always impossible that stocks from different markets will all react negatively at the same time.
Possibility of Greater Returns
This ties into the first benefit of risk minimization. You enjoy the possibility of having a higher income with the more stocks you have in your portfolio. Thus, if the stock market is doing well generally, you benefit. However, if that isn’t the case, it is hardly possible that all the stocks across different industries will be doing poorly at the same time.
Preservation of Capital
Diversifying your portfolio is also a reliable tool for preserving your capital base. For example, if you are close to retiring, your focus is less on the returns you can make and more on preserving your capital. This is one benefit that accrues to you when you invest in the “correct number” of stocks.
Cons of Diversification
Here are some of the disadvantages of diversification:
Possibility of Buying Too Many Stocks
This might not seem like a challenge on the surface, but it actually is one that many investors fall prey to. The idea is not to accumulate as many stocks as possible. If not, you will end up in a situation where the stocks will not gain enough momentum to affect your portfolio positively. Wide diversification actually hurts your position because it would be like putting quantity ahead of quality.
Lack of Effective Monitoring
Portfolio diversification may not necessarily be a good idea if you are not an experienced investment manager. This is except you plan to have someone keep tabs on your investments over the long run. If not, you could run the risk of not effectively monitoring the stocks.
As already stated, some changes affect companies, and some that affect the market. Any of those will potentially impact your portfolio. Hence, you should be able to anticipate and trade, bearing that in mind. If not, you will just end up losing a lot of money, which is antithetical to the intention of owning stocks in the first place. Thus, if you are either incapable or unable to do a great job of portfolio management, then you may want to jettison diversification.
Conclusion: Number of Stocks to Own
Whether you’re just looking to invest small time or your aim is to be the next Warren Buffet, when it comes to how many stocks you should own, the decision rests solely on you. As mentioned above, there are factors, apart from personal preference, that should influence your decision.
The opinions expressed here are not immutable. There is no strict minimum number of stocks or a maximum number of stocks. If you want to go for a small number of stocks, by all means, do so. In all, make sure you are hedging your risk and are actually making money from your investment in the stocks.