For those who invest in individual stocks, the question of how many stocks to own in your portfolio is a common one. Spoiler alert, the answer will vary from investor to investor. That said, there are a number of things to consider in finding the best answer for you.
How many stocks should I own?
The right number of stocks to own depends on your own preferences, your ability to monitor your holdings, the size of your portfolio, your goals, your risk tolerance and a host of other factors.
If you have $1,000 to invest in stocks it probably doesn’t make sense to own 20 or 25 stocks, even though some say this is feasible with the advent of fractional shares for many stocks. A higher number of separate holdings can make sense if you have $10,000 or even $100,000 to invest. Larger amounts to invest might warrant more separate holdings.
The point is that there is no optimal number of stocks to own. You should only invest in stocks (or any other type of investment) that you understand and that you have the capability to monitor.
How to diversify your portfolio
Portfolio diversification is critical as a means for investors to help mitigate risk. Different types of investments will react differently to market and economic conditions. Overall portfolio diversification might include several asset classes including stocks, bonds, cash and perhaps alternative assets.
In diversifying a portfolio, investors should use asset allocation to divide their portfolio holdings among these types of assets. The allocation percentage to each asset class should be based on your investment goals, your timeline, your age, your risk tolerance and other factors.
Investors should periodically review their asset allocation and rebalance back to their target allocation to maintain their desired balance between potential risk and return. Additionally, it's important to review your target asset allocation over time to determine if any adjustments are needed.
Allocation to stocks can be handled through vehicles such as mutual funds and ETFs, individual stocks or a combination of these types of holdings. For those using individual stocks, it's important to look at diversification among your stock holdings in terms of the characteristics of each company.
In a portfolio of individual stocks, there are benefits to diversifying your holdings. Diversifying your stock holdings can help minimize several types of risks, including:
- Company risk: Each company carries unique risks for investors. These can stem from the quality of the firm’s management to a host of other factors including the competitiveness of the company’s products or services. The company’s financial health is always a factor to consider as well.
- Industry risk: Diversifying among stocks in different industries is important. Having all or the majority of your stock holdings in the same industry can expose you to undue risk with things going downward for all firms in that industry. For example, the direction of interest rates can have a huge impact on firms in the banking industry. While tech has done well this past year, that is not always the case.
How big should your stock portfolio be?
There is no single right answer. You certainly want to make sure your stock holdings are diversified by industry and other factors. This helps to ensure that your entire portfolio won’t be hit when business or economic factors impact a specific industry.
On the other hand, owning too many stocks can make it difficult to track your holdings and to do the types of regular analysis and review that is needed to stay on top of the investments that you own.
One criterion is to be sure you understand why you own each stock. This means understanding the company’s business, its pros and cons, what factors could trigger a gain or a loss in value and other factors related to the share price.
While there is no one right answer for the optimal number of stock holdings, some experts say that 20 or 25 might be the right amount. Again, this varies. Ask yourself if you feel you have the time and the ability to adequately track these stocks. This doesn’t mean looking at them every day, but it does mean doing a periodic review of each holding and your overall portfolio. Additionally, it is important to set price targets that would prompt you to sell the shares, both on the upside to lock in gains and on the downside to limit losses.
Another consideration is the size of your portfolio, or at least the portion that you want to have invested in individual stocks. In today’s environment, where it is possible to purchase fractional shares of many stocks, you could conceivably own 20 or 30 stocks with as little as $1,000 to invest. While this is doable, it may not be practical.
As your portfolio increases in size, holding more stocks might be more practical. You can hold both individual stocks as well as managed investments like ETFs and mutual funds to round out your allocation to stocks.
Many investors choose to diversify their stock portfolio by using mutual funds and ETFs. With just a few funds, you can diversify among domestic and foreign stocks, as well as among large cap, small caps and mid-caps. You can easily add factors like growth and value to further diversify your holdings. There are even funds that focus on specific industries and other segments. Mutual funds and ETFs can be actively managed or passive index funds.
Stock diversification pros & cons
Stock diversification pros
Having an appropriate level of stock diversification offers several advantages, including:
- The ability to reduce risks by diversifying among different firms, industries and sectors, which can help to minimize risks when certain sectors or industries are hit by negative economic factors.
- Having an appropriate number of individual stocks helps to minimize the impact of a decline in any single holding on your overall portfolio.
Stock diversification cons
There are also several potential cons to stock diversification, including:
- Having too many stocks can make it difficult to manage your portfolio.
- Owning too many stocks can minimize gains in those stocks that are outperforming, causing you to miss a significant upside.
- Diversification, if not well planned, can result in simply owning a lot of stocks with no clear strategy. Diversification needs to be well-thought-out and done with a clear purpose.
Frequently asked questions (FAQs)
Is 30 stocks too many in a portfolio?
This will depend on the individual investor’s situation. A portfolio that includes 30 individual stocks might be appropriate as long as the investor has the ability to track and review each stock on a regular basis. An investor should also have a reason for owning each stock, as well as a target price range that would potentially trigger them to sell the shares. This can be either on the upside or the downside, in the latter case to limit losses.
Is it OK to have 100% stocks in my portfolio?
The percentage of stocks you hold is up to you. That said, holding 100% of your portfolio in stocks can be risky. This might be appropriate for a younger investor who has a long time horizon and who is comfortable with the risks.
This strategy might involve too much risk for other investors. If they are a bit older and have a higher level of assets, investors may find that the overall benefits of diversification among assets in their portfolio offers a number of benefits over time.
How many stocks should I own with $100,000?
Again, there is no one right answer. A $100,000 allocation to stocks could perhaps support up to 20 to 30 holdings, more or less in some cases, depending upon your desires and your ability to effectively monitor this number of stocks.
This story was written by NJ Personal Finance, a partner of NJ.com. The information presented here is created independently from the NJ.com editorial staff, and purchases made through links in this article may result in NJ.com earning a commission.
