How Many Stocks Should You Have in Your Portfolio? And Should You Buy Foreign Stocks?

In this segment from the Rule Breaker Investing podcast, Motley Fool co-founder David Gardner sifts through his listeners' questions and comments to pick subjects to dive into for your elucidation and entertainment. He calls in reinforcements from the virtual North: David Kretzmann of Motley Fool Canada. And the questioner happens to be a Canadian as well, but his first conundrum is universal: How many individual stocks is the best number for a retail investor to own in his portfolio? There's no absolute right answer, but the Fools weigh in with some guidance. Then they respond to a query that tacks slightly differently for a non-U.S. investor: Should he invest in foreign companies?

A full transcript follows the video.

This video was recorded on March 28, 2018.

David Gardner: Rule Breaker Investing Mailbag Item No. 6. David, welcome back for this point!

David Kretzmann: I'm glad to be back!

Gardner: It's a delight to have you! Have you picked up any of the traditional Canadian accents that a lot of us Americans deal with, like the "eh?" and those kinds of things?

Kretzmann: Well, sorry David! I don't have much for ya. That's about all I've got.

Gardner: I enjoyed your Australian accent when you came back from Australia last year. Would you briefly favor us with that?

Kretzmann: Ah, g'day mate. Let's go get Outback Steakhouse for $9.99.

Gardner: I think David's Australian is better than his Canadian. I think he's pretty good with the Australian.

Kretzmann: I appreciate that.

Gardner: And your Canadian you're still working on it.

Kretzmann: Still working on it.

Gardner: Well, this does come from a Canadian Fool, as a I mentioned. This is from Simon. And Simon went through some of the same things we just heard from Isaac as he got started investing. Making some mistakes, but not too costly when he started at the age of 18. He does mention he lives in Ottawa, and Ottawa is the capital of Canada. I'm going to mention something funny about that a little bit latter.

He said, "I'm now 32. I'm debt-free aside from my mortgage, which I have considerable equity in. Even if a 25% downturn occurs here in Ottawa, Canada, I'm not in the housing market considered at risk, but it's good to know that I do have some safety margins." He subscribes to Motley Fool Stock Advisor Canada, which we certainly appreciate. Thank you, Simon! He's read our investment guide book, etc. Here is question No. 1 from him.

He says, "I like to research companies for stocks that I'm interested in. I've always been very strong mathematically." He likes doing this. "I do," he says, "have a regular full-time job, so I have to do this nights and weekends. Having said that, what would be your recommendation in terms of amounts of diversification? I've read that you can get most of the benefits of diversifying with 10 stocks. I was actually looking at an optimal level of 12 to 15 stocks. This would allow me to keep up to date with the companies without taking too much of my time."

Kretzmann: It's a good question. The short answer is that it's going to be different for everyone. Now, the academic research out there will typically say that once you get above 15 or 20 stocks, or so, your portfolio starts to become more like the index returns, so some academics will try to sway people from owning too many stocks. With that said, I personally own probably close to 70 stocks.

As I mentioned earlier, as an investor your biggest advantage is time, so you really want to structure your portfolio in a way that you're focused more on the long term -- a multi-year holding period -- rather than getting caught up in the short-term movement. So, if you do have only 10-15 stocks in your portfolio, especially if you're a new investor, you're probably going to pay a lot more attention to the inevitable volatility that comes with the market in the short term.

David, I know with Rule Breakers when new members come in, you encourage them to get to at least 15 stocks as quickly as they feasibly can and build their way up from there.

Gardner: That's great. And David, you just shocked me with the number of stocks that you own. I love it. What was that number again?

Kretzmann: It's close to 70. I haven't done an exact count, but it's a lot.

Gardner: Here's a new thing. We're going to debut a new term on this podcast. I don't know if it will stand the test of time. Will it ever survive just this one podcast? Let's call it the Gardner-Kretzmann Continuum.

Kretzmann: I like it.

Gardner: And, of course, continuum with a capital "C." This is the Gardner-Kretzmann with two n's, right?

Kretzmann: Yup.

Gardner: We want to make sure people can spell it. It's got a hyphen between Gardner and Kretzmann.

Kretzmann: OK.

Gardner: And the continuum posits that you should have roughly the number of stocks equivalent to the number of years you've lived on this Earth.

Kretzmann: OK.

Gardner: That's is the Gardner-Kretzmann Continuum. So, I think that I'm a fairly good example of this. I'm 51 and, indeed, I have approximately 51 stocks in my portfolio. Now, even though you've attached your name to this framework, David, you have blatantly violated it. You are an odd -- you are an idiosyncratic creature.

Kretzmann: I'm just playing ahead, David. That's all it comes down to.

Gardner: How old are you?

Kretzmann: I am 25.

Gardner: And you have 70 stocks. You are breaking the Gardner-Kretzmann Continuum.

Kretzmann: I'm ready for retirement, David. What can I say?

Gardner: That is tremendous.

Kretzmann: Maybe I do need to work on my "GKC" score. I'll have to pay some attention to that. One thing I'll also mention is that even if you have a lot of stocks in your portfolio, you can still have a concentrated portfolio, because oftentimes, especially if you subscribe to the Rule Breakers style of investing, you'll let your winners become a bigger part of your portfolio and even add to those winners over time. Even if you have, say, 50 stocks in your portfolio, there's probably a good chance, if you're a Rule Breakers style investor, that your top 10 or 15 positions will make up 50% or more of your total portfolio. Just something to keep in mind.

Gardner: You're darn tootin'. Well put, David, from one David to another.

Kretzmann: I appreciate that.

Gardner: All right, from the Gardner-Kretzmann Continuum we go to his second question, which is basically about Teladoc. Asking if that's a stock that we like. I'm not going to speak to that, here. I will say that it is in our Motley Fool Rule Breakers service, so it is a company that we consider a Rule Breaker, and thanks for asking about that, Simon.

But the last one is the real Canadian question, David, so here you go. "Since I'm Canadian," he says, "what are your thoughts about investing in a foreign stock exchange? From my perspective," Simon writes, "it would be investing in U.S. stocks mostly, but from yours, it could be investing in global stocks outside the U.S. I'm mainly interested in hearing your view on investing outside of an investor's home country and should there be focus on, let's say, currency exchange rates before investing? Thanks again and love your RBI podcast."

Well again, Simon, we love your note, because you enabled us to create an entire new investment concept this podcast. David, what are your thoughts about investing outside one's country, especially thinking about Canada vis-a-vis USA.

Kretzmann: I think for U.S. investors it's probably not quite as pivotal as it is for someone in Canada or another country. Using Canada as an example, if you just look at the primary index in Canada, the S&P/TSX Composite, roughly comparable to the S&P 500 here in the U.S., the S&P/TSX Composite is made up primarily of financials, energy, and materials or miners. About 65% of the index is in just those three industries, which tend to be industries that don't represent a whole lot of our Foolish recommendations.

Gardner: You're right. They're also very cyclical and volatile, right? And they're commodity-dependent.

Kretzmann: Right, so not industries that we generally will find attractive companies that we want to hold for the long term. Oftentimes, the Foolish Universe is made up of healthcare, consumer discretionary, technology, and things like that. So, in the case of Canadian investors, just buying an index fund in Canada, or a Canadian-based index fund isn't getting you a whole lot of diversification. It's actually overexposing you to three relatively unattractive industries.

So, if you're a Canadian investor, I think the idea of investing in the U.S. or potentially outside of the U.S., as well, becomes more important for Canadian investors. And you see a similar story in other countries like Australia where it's banking and mining that make up more than 50% of their S&P index there.

For U.S. investors, we have the benefit of a lot of foreign companies listing on U.S. exchanges, so we don't have to go to a lot of trouble to open up a special brokerage account to invest directly on the ASX over in Australia, or the TSX in Canada. Companies like Shopify from Canada, or Atlassian in Australia, or Alibaba from China are all listing on U.S. exchanges.

And for whatever reason, it's a lot harder to invest through a U.S. brokerage overseas than it is for, say, a Canadian investor to invest on U.S. exchanges. So, if you're in the U.S., probably stick with companies that are listed on the U.S. You'll get a lot of diversification as far as geography goes. As far as industries go. But for Canadian investors, in this case I think you'd be wise to look outside your home market.

Gardner: How does Motley Fool Stock Advisor Canada work?

Kretzmann: That service each month will recommend one Canadian company and one U.S. company that's also been recommended over here in the U.S. in our U.S. services. We're really trying to push members to move beyond that home-country bias, because we all tend to have that. Canadian investors oftentimes won't go out of their way to invest outside of Canada.

One site I will mention, here, just to reinforce the importance of looking beyond that market. Over the past five years, the S&P 500 is up 69%. The S&P/TSX Composite is up just 24%. So, really trying to reiterate the importance to our Canadian members that you want to look beyond the Canadian market. We can find some attractive companies in Canada, of course, but we also want to look toward the U.S.