Finance

How Many Stocks Should You Have In Your Portfolio

By mlamoureux - March 01, 2019

The investment space has, in recent years, gained a great many new voices. What was previously a pretty calm, straightforward, conservative and staid space has given way to television hosts, internet-based experts, and even robo-investing platforms. These newcomers and new tools have essentially and fundamentally disrupted the investment space.

Twenty to thirty years ago we were mostly at the mercy of our financial advisors, as we had no easy way to understand the stock market and other investment venues unless we were in the financial services industry. Now there is an entire entertainment and infotainment product offering on television and on the internet for those who want to learn more about investing, markets, stocks, bonds, dividends, and all of the other terms one has to know inside and out to be a successful investor and stock trader.

None of this matters, however, if you don’t understand the basics of investing in stocks.

 

PROPER MARKET DIVERSIFICATION IS KEY

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Some people approach stocks as if they were picking a horse to win a race. They fork over a sum of money with an approach that’s akin to making a bet. This isn’t a good way to look at or work the market; it’s the equivalent of putting all your eggs in one basket.

Stock picking might work like this in the movies, but it doesn’t work like this in real life. And, if you’re trying to save for your retirement, this is not an approach you’d want to employ, because it is unstable and far too risky.

Regardless of whether they’re investing via your bank, a financial services behemoth like Fidelity or a cheap online brokerage, seasoned investors diversify their portfolios. Yes, they too are “betting” on the companies they own pieces of to increase in value over time, but a properly diversified portfolio controls the risk inherent in investing, and allows for long-term growth even if one or two investments lose money.

Stock allocation and/or asset allocation is another strategy for long-term growth, and falls under the umbrella of diversification. Diversifying means acquiring several different stock offerings, but it also means acquiring a diverse group of securities. Owning 100 different tech stocks won’t help you if the tech bubble bursts; spreading your money around different sectors is a long-term smarter play.

But let’s rewind for a moment. If the question is “how many stocks should you have in your portfolio?” please understand that this question has no answer. It’s as precise a question as “how many french fries is the best number of french fries?” In actuality, an individual’s answer (to the stock question, not the french fry question) will depend on that particular individual’s age, wealth, risk tolerance, time horizon (how long they plan on holding a stock or asset), and end goals.

STOCK DIVERSIFICATION IS JUST AS IMPORTANT

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People with time to invest in their portfolio will invariably have larger and more diversified portfolios, because they have time to do proper maintenance. Conversely, those with less time should not have 100 stocks in their portfolio, because their inability to stay on top of their investments will invariably lead to losses.

A good rule of thumb comes from one of the most famous investing books ever written, 1949’s The Intelligent Investor, in which Benjamin Graham — known as the “father of value investing” — recommended having between 10 and 30 stocks in one’s portfolio. Graham, it should be said, wasn’t advocating for a scattershot approach to stock picking. Rather, he carefully vetted everything he invested in.

In 2005, a writer at Investopedia noted that “For investors in the U.S., where stocks move around on their own more (are less correlated to the overall market) than elsewhere, the number is about 20 to 30 stocks.” The writer goes on to note that this number was calculated before the boom of online investing, and that within that milieu, people have around 50 stocks.

Many experts that suggest a lower number of securities (a combination of stocks and funds, like the world-famous Vanguard ETFs, for example) when the investor is inexperienced. Building a modestly valued portfolio into a success often happens over time, and with a lot of research and confidence behind every investment decision. A prudent approach would be to invest.

No one can tell you what approach to investment is right for you. Only you know that. However, it’s worth mentioning that the rules of the stock market have pretty much always been the same. Stable, long-term growth — especially if you’re planning for retirement — is likely the best way to go. All of which is to say that those Vanguard ETFs or similar products may not look that appealing today, but after growing steadily over the course of your career, could amount to a pretty respectable nest egg.