How Many Stocks Should I have in My Portfolio?
When diversifying your equity portfolio, the goal is to reduce risk and engage in as many market segments as possible. Chris Graff, CEO investment officer at RMB Capital, says that financial experts believe that 20% is the minimum number of shares necessary to recognize portfolio diversification benefits. It is best to limit them to 30 shares based on statistical analysis.
There is no one-size-fits-all solution, and you must take many factors into account if you want to achieve the ideal number of shares in your portfolio. Diversification – investing in more than one share or other investment – is an important consideration when building a portfolio. Building a diverse portfolio of stocks can be achieved in many different ways: an investor can be guided by their passion for an industry or company, or they can be drawn by the ease of setting up a low-earning ETF.
The right number of stocks in your portfolio depends on several factors such as your country of residence, your investments, your investment period, market conditions and your propensity to read market news and keep track of your holdings. In addition, experts say how many shares you have in your portfolio will depend on several factors, including your investment experience. Finally, you need to understand that the number of shares in a portfolio is not random or invested.
Diversifying your portfolio is important, but no matter how much money you invest, buying 20 or 30 stocks can be cumbersome and time-consuming if you have only $1,000 at your disposal. Many investors use mutual funds or ETFs to allocate shares in their portfolios. It says the number of individual shares in an ETF or investment trust in your total portfolio should be considered, rather than counting them as specific niche funds focused on a corner of the industry.
In summary, whether you are a novice or someone with extensive experience, it is wise to add at least 20 shares to your portfolio and invest the same amount of money in each share. Trying to manage a portfolio of 50 or more shares can be daunting for most individual investors to the point where you may be better off with index funds. If you want to keep your costs down, experts recommend purchasing a portfolio of 12 to 18 shares to diversify the risk rather than holding individual shares.
For most investors, the number of shares in their portfolio should be between 15 and 25, depending on the investment strategy. The investment strategy determines how many stocks you should own, whether you want a concentrated portfolio of high-dollar blue-chip stocks or whether you invest in high-growth small-cap stocks and diversify them with a larger number to reduce the risk of investing. A popular rule of thumb is to have between 12 and 18 shares, but this number can change based on how varied and manageable your portfolio is.
The quality of the research and the amount of information you collect before investing play an important role in deciding how many shares to buy and the concentration and diversification of stocks in your portfolio. The goal of diversification is to understand why you should invest in the stocks you own. Once an investor has researched what sort of diversification makes sense and decided how many stocks to own, they are ready to take the first step toward building the right portfolio.
In the book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown write that having 12 to 18 stocks gives you more than 90% of the advantages of diversification. Although owning a larger number of shares can offer diversification benefits, many investors diversify their portfolios because they are attracted to a certain type of stock. Regardless of how well an investor creates a diversified portfolio of stocks, it is important to remember that all investments carry risks, including the possibility of losses.
The greater the number of different stocks in a portfolio, the less impact one of them has, on the whole, she says. In the 1970s, the academics Lawrence Fisher and James Lorie published their findings stating that a portfolio of 30 stocks offered enough diversification to limit risk while generating returns. As the chart above shows, remember that it comes from one of the most important proponents of the efficient market hypothesis, which speaks not only of the investor’s ability to beat the market but also that once you reach 20 to 25 stocks in the portfolio, you have understood the benefits of diversification.
If you own too many stocks, none of them will likely move enough to affect the performance of your portfolio, good or bad, to the effect of their previous holdings. On the other hand, a single fund can add dozens of shares to your portfolio yet ensure that a company’s performance is only a small part of your total portfolio and does not threaten your portfolio to the same extent. Twenty individual stocks is a good rule but, adding Arnott; you want to ensure you never allocate more than 5% of the portfolio to a stock.
Diversification is often used to invest in different asset classes, such as shares, bonds and cash, but can also be applied to the equity portion of your portfolio. For example, if 2 to 3 percent of your portfolio is in stock, it can provide a cushion if that stock fails: you have not tied up so much of your money in another investment, and you are less ruined. Respondents who owned at least 50 stocks had portfolios of up to $7 million, and their primary reason for owning so many stocks was a devotion to buy-and-hold investments: they have held their positions for at least 20 years.