What Is the Ideal Number of Stocks to Have in a Portfolio?
What Is the Ideal Number of Stocks to Have in a Portfolio?
While it might seem that many sources have an opinion about the “right” number of stocks to own in a portfolio, there really is no single correct answer to this question.
The correct number of stocks to hold in your portfolio depends on several factors, such as your country of residence and investment, your investment time horizon, the market conditions, and your propensity for reading market news and keeping up-to-date on your holdings.
- While many sources have an opinion about the “right” number of stocks to own, there really is no single correct answer to this question.
- The correct number of stocks to hold depends on a number of factors, such as your investment time horizon, market conditions, and your propensity for keeping up-to-date on your holdings.
- While there is no consensus answer, there is a common thought that diversification is absolutely key to long-term returns.
- A well-diversified portfolio reduces the exposure to unsystematic risk—the risk associated with a particular company or industry.
- Consider, however, the transaction costs of holding an increasing number of stocks. It is generally optimal to hold the minimum number of stocks necessary to effectively remove their unsystematic risk exposure.
Understanding the Ideal Number of Stocks to Have in a Portfolio
Investors diversify their capital into many different investment vehicles for the primary reason of minimizing their risk exposure. Specifically, diversification allows investors to reduce their exposure to what is referred to as unsystematic risk, which can be defined as the risk associated with a particular company or industry.
Investors are unable to diversify away systematic risk, such as the risk of an economic recession dragging down the entire stock market, but academic research in the area of modern portfolio theory has shown that a well-diversified equity portfolio can effectively reduce unsystematic risk to near-zero levels, while still maintaining the same expected return level a portfolio with excess risk would have.
In other words, while investors must accept greater systematic risk for potentially higher returns (known as the risk-return tradeoff), they generally do not enjoy increased return potential for bearing unsystematic risk.
The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 or more stocks, particularly those across various sectors or industries, is much less risky than a portfolio of only two stocks.
Consider Transaction Fees
Of course, the transaction costs of holding more stocks can add up, so it is generally optimal to hold the minimum number of stocks necessary to effectively remove their unsystematic risk exposure. What is this number? There is no consensus answer, but there is a reasonable range.
A well-diversified equity portfolio can effectively reduce unsystematic risk to near-zero levels, while still maintaining the same expected return level a portfolio with excess risk would have.
More recent research suggests that investors taking advantage of the low transaction costs afforded by online brokers can best optimize their portfolios by holding as many stocks as they want. However, there is a time-cost fallacy and most investors find their portfolios can perform just as well if not better, by choosing index-based securities instead. These are called exchange-traded funds (ETFs).
If you are intimidated by the idea of having to research, select and maintain awareness of many different individual stocks, you may wish to consider using index funds or ETFs to provide quick and easy diversification across different sectors and market cap groups, as these investment vehicles effectively let you purchase a basket of stocks with one transaction.
How Many Stocks Should You Own for a Diversified Portfolio?
There is no magical number, but it is generally agreed upon that investors should diversify their portfolio over the sectors they want exposure to, while keeping a healthy allocation in fixed-income instruments to hedge against individual company or sector downturns. This usually amounts to at least 10 stocks at the very least.
How Many Stocks and Bonds Should Be in a Portfolio?
The answer depends on the approach you adopt in your asset allocation. If you take an ultra-aggressive approach, you could allocate 100% of your portfolio to stocks. Being moderately aggressive. move 80% of your portfolio to stocks and 20% to cash and bonds. If you wish moderate growth, keep 60% of your portfolio in stocks and 40% in cash and bonds. Finally, adopt a conservative approach, and if you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks. A good rule of thumb is to scale back on the percentage of stocks and increase your high-quality bonds as you age, in order to be better protected from potential market downturns. For example, a 30-year-old investor would hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.
How Many Stocks Should I Own With $10,000?
Investors are choosing more often than not to diversify their investments using ETFs. This gives them access to many more companies than they would be able to have access to if they were to purchase individual shares of those companies. $10,000 invested into a number of ETFs could result in exposure to thousands of securities.
Russell Wayne, CFP®
Sound Asset Management Inc., Weston, CT.
The number of stocks in a portfolio is in itself unimportant. That’s because a portfolio could be concentrated in a few industries rather than spread across a full spectrum of sectors. In such a case, you could hold dozens of stocks and still not be diversified. If, on the other hand, the stock holdings were diversified over a wide variety of industries, two or three dozen should be sufficient. Here, too, proper stock selection will make a big difference. It usually helps to focus on the stronger players in each industry in order to take advantage of the potential that each industry provides. Look at the components of the Dow Jones Industrial Average: Those are 30 of the best-known names in the U.S. corporate world.