Diversification is not an end in itself, but rather a way to mitigate portfolio risk. So the question of "How many stocks should I own?" will be different for everyone … but still, there are some good principles to think about.
Eddy Elfenbein, who writes about investing at Crossing Wall Street, is known for being a buy-and-hold investor -- CNNMoney named him "the best buy-and-hold blogger" on the Web -- and on his site, he has a public portfolio of 20 stocks. Last month, during an hourlong interview in Washington, D.C., I asked him whether he thought 20 stocks made for a diversified portfolio. Watch the following video for our exchange. (Run time: 1:40; a transcript follows the video.)
Brian Richards: Let me ask one more question about the size of the portfolio. So you have 20 stocks on the buy list. How many stocks would you advise a do‑it‑yourself retail investor to potentially own? Is 20 enough for broad diversification, or how do you advise people on that?
Eddy Elfenbein: Twenty is a very, very large portfolio. Actually you can be well diversified in as little as eight stocks. You'd be very well diversified in eight stocks.
Now, the key is being diversified. A lot of people feel I am diversified, I own Google and Apple and Oracle, and you want to have different categories. You want to make sure there are cyclicals, non-cyclicals, income stocks, tech stocks, health care -- always a good sector. And that's the way you can have a nice, balanced portfolio.
So you can be very well diversified with just eight stocks. I think the advent of online brokers and the lower commissions is great for individual investors and do-it-yourselfers who can get out and do that. And as you build up your portfolio I think if you're dedicated to following a name -- I have 20 names -- your goal should be you can have as large a portfolio as you can. ... I don't think there's any limit to that.