LifeGoal Investments Blog
How Many Stocks Should I Own: A Guide
How Many Stocks Should I Own: A GuideEveryone talks about keeping an investment portfolio diversified. You should have a handful of stocks here, and another handful there.
But does anyone ever tell you exactly how many stocks your diversified portfolio should have? If we could ask the magic mirror on the wall to tell us the answer, we would!
Sure, there is a suggested number of stocks you should hold but there is no solid answer. That’s because there are variables that affect the success of a portfolio.
What is the Ideal Number of Stocks To Own?1000s of stocks, from all over the world. Diversification is global, and you should invest in large and small stocks to help create wealth, growth, and value. Nearly 53% of American families own stock, ranging from mutual funds to retirement plans.
So, how many stocks should I own? If you are looking for the perfect response to this question, you may not find it. Everyone’s situation varies. However, many experts have provided their advice, saying that 20 to 30 stocks are a good range.
Of the number of stocks you decide to hold, there are additional questions to answer.
- Do you hold 20 to 30 different types of stocks, diversifying your portfolio?
- Do you add to your original stock holdings?
The preference is yours. They both carry their pros and cons. What matters is what works for you best so that you see the growth you long for.
Can a Portfolio Have Too Many Stocks?Let’s ask this question a different way. Is having more of something better than having less of it?
That all depends. In short, yes - it’s possible to go overboard to the point where a portfolio may no longer be manageable or it can feel overwhelming.
How many stocks would you categorize as being manageable, based on the time you have available to routinely assess your portfolio?
Time and effort play a vital role in a successful portfolio. Before purchasing stocks, don’t you agree it’d be best to research the company you are about to invest in?
How About Too Little?
Ever heard the saying “less is more?” Sometimes, it’s best to keep the bucket half full so that you can focus more on what you have. It gives you more control over their performance too.
By performance, we don’t mean that you can control the market itself. There would be pure mitigation of risk if that were the case!
You have a more in-depth touch, though, on the trends of each stock handling a smaller population. It also helps when making buy or sell decisions.
Pros and Cons of a Large and Small PortfolioBreaking it down further, let’s take a look at the pros and cons of a large stock portfolio and a small portfolio.
- Increases your assortment of stocks, diversification
- Diversification generally reduces your level of risk, mitigating losses
- Has a potential tax impact to your benefit, known as tax-loss harvesting
- Greater size brings greater responsibility, there’s more to manage
- Costs incurred are larger, depending on the fees associated with your brokerage account
- Time and effort are of value but are at stake
- Great for beginners, and easier to manage
- Results from outperforming stocks are impactful to the growth of the portfolio
- Proper Diversification is often not attained, resulting in increased possibility for potential loss
- Stock appreciation upside is not captured – you may be invested in the right sector but not the right stock.
- Retirement goals may not be achievable or may take longer to reach
Factors to Consider When Buying StocksDetermining the perfect number of stocks for your portfolio is reflective of numerous factors. This includes:
- Your objective - what is your overall investment strategy and how does it fit?
- Where you live
- Where your investments reside - within the U.S. or globally
- Your investment time horizon and risk tolerance
- Market conditions and volatility
- The time and effort you plan to set aside to “be in the know” with your selected holdings
Asset Allocation and Diversification - Why Are They Important?You may have your eye on the prize, that is, a specific company or industry you want to invest in. What drives your decision is important to note. How does it fit into asset allocation and diversification?
Defining Asset AllocationIn the process of asset allocation, you need to determine where to put your money so that it works in your favor. Otherwise, what’s the point of investing in it if you don’t set yourself up for success at the beginning?
Asset allocation doesn’t focus solely on stocks. It includes other securities, such as bonds, and even cash. This concept relies on the allocation and re-allocation of these three primary asset classes, working together, over time, to optimize a portfolio’s potential return based on a certain level of risk that you, the investor, is comfortable with. This is the stage you need to consider your risk tolerance and time horizon. Risk tolerance varies by individual
You may be cautious at the early stages of investing, not willing to lose your original investment during a period of time. Or, you may have a higher risk tolerance and go all in.
Either way, the concept of higher risk generally leads to the exchange of a greater return.
The time horizon represents the time period required for your investments to meet your financial goal. Generally speaking, younger investors can take on a higher level of risk with their investments, because they have more time over the long run (say, to retirement for example) to make up for any short-term losses.
Defining DiversificationYou’ve heard the saying, “don’t put all your eggs in one basket” before right? This is an old proverb dating back to the 1600s and stands true today.
What does it mean in relation to stocks? It’s best to keep your options open. Mitigate your risk by including stocks across different countries, industries, etc.
Stocks can complement each other. As the value of one is trending downward, another may be moving upward allowing your portfolio at the very least to break even. This is the role of diversification.
Don’t limit yourself to individual stocks either. Mutual funds and exchange-traded funds (ETFs) are two options, reducing time and effort in selection.
Can You Over Diversify a Portfolio?Yes. Too much of a good thing could be bad. This goes in hand with having a large portfolio is the risk of over diversifying it.
It is possible that including too many types of investments can decrease the return on investment. The added benefit from diversification is eliminated. Risk reduction is less than that of expected gains.
We can’t stress the importance of learning and understanding your investments enough. This knowledge deters you from overlapping shares between mutual funds and exchange-traded funds.
Over diversification is avoidable, as long as you keep your investments at a manageable level. That level can only be determined by you.
A Quick Reference Guide to Buying StocksHere are the high-level steps to follow to get started:
- Choose a broker and open a brokerage account
- Research, research, research! Think about what you want to buy whether it’s hot on the market or something of interest and review its stats
- Determine how much you can afford to purchase
- Optimize your portfolio through asset allocation and diversification
About StocksOf the securities investors can choose from, stocks tend to classify as having the greatest risk but also the highest returns. This is the best of both worlds when appropriately managed.
Patience is a virtue in buying stocks. It’s about mind over matter. Prepare yourself mentally when first starting off. You’ll experience many hills and valleys over time, striving for positive results.
The Bottom LineWith 1,000s of stocks to choose from in the market, there’s definitely not a shortage! Options range from the United States to overseas, all over the world!
From beginner to expert, you’ll need to assess how much you can handle in terms of managing your portfolio. Be wary, though, not to hold too many or too few. The right balance takes time to master.
LifeGoal Investments is here to help you understand the importance of investing and is ready to help you strategically build a financial portfolio so that you can focus on today and be prepared for the future.