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If you’re a self-directed investor looking to build a portfolio of individual stocks, asking yourself how many stocks you should own is one of the most important questions you’ll need to answer. Financial advisors routinely recommend diversification, but how much is enough—and how much might be too much?
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There are general guidelines, but we’ll give you some more detailed answers.
How many stocks should you really own?
It’s sometimes believed that the number of stocks you should have in your portfolio depends on its size. For example, it will vary significantly if you have $1,000, $10,000 or $100,000 to invest.
But as it turns out, the size of your portfolio may not be as important as it seems. That’s because investing through fractional shares is commonly available with popular brokerage firms. It enables an investor with $1,000 to diversify in as many companies as someone with $100,000.
What’s the right number of companies to invest in, even if portfolio size doesn’t matter?
“Studies show there’s statistical significance to the rule of thumb for 20 to 30 stocks to achieve meaningful diversification,” says Aleksandr Spencer, CFA® and chief investment officer at Bogart Wealth. “Personally, I think risk tolerance and aptitude for research should be the real driver. Depending on one’s risk comfort level, coupled with how deep into the weeds you’re willing to go, a more concentrated portfolio can be OK too.”
The importance of diversifying your stock portfolio
The whole purpose of holding multiple stocks in a portfolio is diversification. That means holding enough securities so that a big drop in one won’t cause your entire portfolio to take a big hit.
For example, if you hold five stocks in your portfolio, with 20% in each position, a 50% decline in one stock will translate to a 10% drop in the value of your portfolio.
But with 20 stocks in your portfolio, each representing about 5%, a 50% drop in a single stock will translate into a drop of just 2.5% in your portfolio.
Of course, whether you have 20, 30, 50 or 100 stocks in your portfolio, there’s no guarantee diversification will completely prevent declines. But it will minimize the impact of a drop in a single stock.
How to diversify your portfolio
Diversification is about much more than simply holding a certain number of securities. It applies in different areas of your portfolio. Use the following guidelines to see how well your investments embody these principles.
It’s possible and desirable to invest in different types of stocks. Stocks fall into one of several broad classifications, and you can spread your portfolio among as many as possible.
For example, you may want to hold some of your portfolio in growth stocks. Those are stocks with a history of price appreciation. They typically pay no dividends (instead, extra capital is invested back into the business).
You may want to counterbalance that by adding dividend stocks. These are more mature companies that have longer track records, as well as a history of both paying and increasing dividends. The combination of the two categories can give you a healthy mix of growth and income in your portfolio.
You may also want to incorporate a mix of large-, medium- and small-capitalization stocks into your portfolio. That’s because one cap-size group may outperform another. By positioning yourself in all three, you’ll be able to get the benefit of outsized growth in at least one.
No matter how much you may believe in one or two industries, you should never concentrate your portfolio on those groups. If you’re going to invest in 20 to 30 individual stocks, they should be spread across several different industries.
“If an investor is aiming to add diversification to their portfolio by handpicking or selecting certain funds or stocks, it is prudent to consider investing in companies of various sectors and different sizes,” advises Jason Werner, investment advisor and founder at Werner Financial. “This could mean investing in sectors like technology, healthcare, energy, financials, or consumer goods.”
The heavy concentration of growth in tech stocks from 2009 through 2021 may not be as reliable in the future. You can certainly hold tech stocks, but those positions should be counterbalanced with stocks in other industries.
Remember, diversification and a clear understanding of your risk tolerance are key in any investment strategy. It's always wise to take advantage of educational resources before making significant investment decisions. Consider using a self-directed investing tool such as J.P. Morgan Self-Directed Investing*, which offers learning guides to help you make informed decisions and allows you to trade stocks, bonds, mutual funds, and ETFs freely.
Maintain balance in your portfolio
Whether you own 20, 30, or many more stocks in your portfolio, you will need to rebalance periodically. That will keep high-performing stocks from being overrepresented in your portfolio.
There are different ways this can be done. For example, if you plan to hold 20 stocks, each representing 5% of your portfolio, you can choose to rebalance annually, semiannually, or quarterly. That will enable you to reset your portfolio at the original target of 5% for each stock.
It also has the benefit of enabling you to sell stocks and book gains on the strongest performers. At the same time, you will be buying the weaker performers at lower prices.
Another strategy is to rebalance when one or more stocks reaches an excessive allocation. For example, you might decide to sell some of a high-performing stock if it reaches 10% of your overall portfolio.
There are various strategies you can use, and any will be successful if they enable you to prevent any single stock or industry sector from being overrepresented in your portfolio.
Add unrelated asset classes
Diversification needs looking beyond your stock portfolio. You should also hold a healthy number of fixed-income investments, such as bonds and U.S. Treasury securities, to add balance to your portfolio. In addition to diversifying your stock portfolio with fixed-income investments like bonds and U.S. Treasury securities, we highly recommend considering Yieldstreet for alternative investments, as it can further enhance the balance and potential returns in your overall investment strategy.
If you feel the need to achieve greater diversification in your stock portfolio, but don’t want to manage scores of positions, move some of your portfolio into exchange-traded funds (ETFs). That will give you the extra diversification needed without the management headaches.
How many stocks should you own with $1K, $10K, or $100K?
Once again, the number of stocks you purchase is less dependent on the size of your portfolio due to the ability to invest using fractional shares. But what may matter more are your own investment goals and risk tolerance.
For example, if you’re in your 20s and have a very high-risk tolerance, you may want to limit your portfolio to 10 or 15 stocks. That’s because your long time horizon can enable you to overcome any short-term dips.
Conversely, if you’re in your 50s and nearing retirement, you may want to hold closer to 30 stocks. That will lower the risk of loss if one or two stocks go sour.
“Unfortunately, the answer to this question is ‘it depends’," warns Robert R. Johnson, Ph.D., CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University. “If you have a portfolio of ten energy stocks, you aren't well diversified. That is why most beginning and small investors should focus on diversified, low-cost funds that track widely diverse indexes such as the S&P 500 or the Russell 2000.”
Too many vs. too few stocks: pros and cons
Let’s break down the pros and cons of each situation.
Too many stocks (over 30)
- No single stock will determine the overall direction of your portfolio.
- Lower risk of sudden and severe portfolio declines.
- Greater ability to diversify by industry sector and company size.
- Greater ability to take advantage of tax-loss harvesting.
- Managing a large portfolio can turn into a full-time job.
- When a portfolio holds too many companies, it starts to look more like a mutual fund and is less likely to outperform the market.
- There is no guarantee you won’t experience portfolio losses, no matter how many stocks you hold.
Too few stocks (under 20)
- Easier to manage.
- A few strong performers can seriously boost portfolio returns.
- Greater ability to focus on top performers, rather than larger numbers of less attractive companies for diversification purposes.
- A few weak performers can seriously hurt portfolio returns.
- Your portfolio may become dependent on a small number of high performers.
- You can take big losses if the market turns and your holdings are too heavily concentrated in one or two sectors.
“Most research suggests the right number of stocks to hold in a diversified portfolio is 25 to 30 companies,” adds Jonathan Thomas, private wealth advisor at LVW Advisors. “Owning significantly fewer is considered speculation and any more is over-diversification. At some point after continuing to add individual stocks to your portfolio, you may ‘own the market’ and be better served in purchasing an index fund that’s able to trim positions and rebalance in a tax-efficient manner.”
How often should you swap stocks?
The answer to this question depends on whether you are a buy-and-hold investor or an active trader.
As an active trader, you’ll swap stocks as frequently as needed to generate the short-term profits you seek.
If you’re a long-term, buy-and-hold investor, you’ll want to trade as little as possible. If you choose companies with strong fundamentals and prospects, you should hold those positions as long as the company profiles remain positive.
But whether you are an active trader or a buy-and-hold investor, knowing when and how often to trade stocks isn’t always cut and dry. It will require constant monitoring of your holdings, including awareness of any day-to-day developments.
If you want to invest in individual stocks, but don’t have the time, experience, or inclination to build and manage your portfolio, consider using a financial advisor. You can find one through WiserAdvisor. They offer a financial advisor matching tool webpage to help you find the right advisor for your investment needs and preferences.
Frequently asked questions (FAQs)
Can you over-diversify a portfolio?
Yes. Holding 50 stocks rather than 25 may lower your downside risk somewhat, but it can also reduce your profit potential. And at that point, it may be better to consider investing through an index fund, or even a combination of several sector-based funds.
Which sectors are expected to do well in 2023?
Given the uncertainty in both the economy and the financial markets over the past couple of years, that’s a difficult call. Exactly which stocks will perform best will depend on which way big-picture events break.
“2023 is a year where finding good companies will drive returns more than picking a good sector,” advises Adam Taggart, CEO and founder of Wealthion. “Look for companies with positive cash flows, low cost of capital, engaged in industries that are attracting capital, and who can raise prices in response to inflation.”
“Sectors to investigate,” Taggart continues, “include hard asset producers (e.g., mining and energy companies)—especially royalty companies, infrastructure, and any involved in the electrification of the grid. Classic diversified outperformers like Berkshire Hathaway should also be on your radar.”
What about the tech sector, which took such a beating in 2022?
“We could see large-cap tech stocks bounce back in a major way,” recommends Jason Mountford, market trend analyst at Q.ai. “They’re all still down significantly from their all-time highs. However, many investors will want to remain cautious in their investment selection in 2023. Stocks in the energy and healthcare/pharmaceutical sectors could do well. They offer substantial upside in bull markets, but also offer defensive characteristics to investors who are concerned about further volatility.”
How do you compare different stocks?
Comparing different stocks is all about identifying which in any given group or industry have stronger fundamentals than the others. Even if you use stock screeners, you’ll still need to do a lot of research.
“Pick quality companies that have low debt, high cash flow, good operating profit, generating revenue, and great management,” recommends Sankar Sharma of RiskRewardReturn.com. “Once you have this list, select the stocks in a performing sector. Avoid stocks that have a single product or service, are losing money, frequently need to raise cash, or have low cash flow. In other words, to compare stocks, investors should use earnings, profitability, management, cash flow, debt, and operating margin as the criteria to compare and separate good from bad.”
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